Canada: My Partner Is A Fraud, I Know It, But My Bank Should Still Cover My Fraud Loss And Other Christmas Wishes That Won't Come True

The Court of Appeal for British Columbia recently affirmed a 2015 Supreme Court of British Columbia decision that highlights the importance of a well-drawn Account Agreement which clearly stipulates the contractual duties expected of a customer to verify their accounts, but also confirms that a customer with actual knowledge of forgery must make timely report of such to their bank or risk being precluded claims against the bank for the forgery.  The lower court decision also provides useful guidance on the process for proving the existence and enforceability of agreements and documents that are lost or destroyed.  Finally, the lower court decision maps out how to best engage British Columbia's summary trial process for resolution of claims without proceeding through a full trial.

Background Facts

The plaintiff, D2 Contracting Ltd. ("D2"), held a business account with The Bank of Nova Scotia ("Scotiabank").  Nearly 600 impugned cheques were issued over 3 years. D2 claimed against Scotiabank for $1,289,600.90, asserting that those cheques wrongfully withdrew funds from its account before the fraud was stopped in April 2009. One of the two authorized signatories of D2's account forged the signature of the other authorized signatory, doing so both on the cheques at issue as well as on many operational cheques used for the business. 

D2's Claim against the Bank

In 2012, D2 commenced action against Scotiabank.  D2 alleged that the bank's practice of not verifying all signatures on cheques, the use of the Automated Clearing Settlement System and use of Symcor as a clearing agent caused or contributed to the loss, thereby rendering the bank liable.  D2 further alleged that the bank had a duty to its customers of its practice on verification of signatures, but failed to do so.

The Bank's Defences

By the time D2 commenced action, the account had long since been closed, Scotiabank's branch manager had retired and the branch had gone through a major renovation.  As sometimes can happen, all signed originals and copies of the banking documents had been lost, including the original Account Operating Agreement needed to establish the bank's contractual defences.  Nevertheless, the bank asserted that D2 had positive contractual obligations to have effective fraud prevention controls, and a duty to verify account statements within the 30 day window provided. As the litigation unfolded, evidence on cross-examination revealed that while the rogue principal clearly knew about the fraud from the outset, the other director had on many occasions seen and indeed cashed cheques to his own account that contained his forged second signature. 

The Issues and Decision of the Lower Court

The lower court addressed four substantive issues:

  1. Are the parties bound by the terms of an account agreement?
  2. If yes, is the account agreement ambiguous and therefore not enforceable against D2?
  3. Did D2 breach the terms of the account agreement by: (a) failing to review and verify the account statements and report to Scotiabank as prescribed by the agreement? (b) Failing to maintain controls to prevent and detect fraud, forgeries, or theft as prescribed by the agreement?
  4. Is D2 precluded from seeking relief under s. 48 of the Bills of Exchange Act because of Mr. Cooper's and therefore D2's actual knowledge of the forgery?

Scotiabank proved the existence of the Account Agreement through a combination of affidavit evidence of the "invariable standard practice" of the former branch manager who always provided a copy in the "Welcome Kit" as well as through cross-examination evidence of D2's principals, accepting the rogue's evidence of his belief that he had signed an agreement and finding the other principal's evidence to the contrary inconsistent and implausible.  The lower court found that in the absence of fraud or misrepresentation, a businessperson is bound by an agreement to which he or she has put his or her signature, whether or not he or she has read its contents or has chosen to leave them unread. Further, the lower court found that Scotiabank's account agreement, and in particular, the verification language, was clear and unambiguous.  The customer had a positive duty to identify forged or unauthorized instructions, failing which, after the 30 day window the loss was to the customer's account. 

The lower court found that there had been no representation made about the bank's use of a clearing agent, that such was expressly permitted under the terms of the Account Agreement, and that in any event, there was no principled argument to assert that the use of a clearing agent in any way caused or contributed to the loss or changed the standard of care. 

The decision also explored the common law defence of "preclusion" and its interplay between actual knowledge of forgeries on an account and the failure of the account holder to meet their duty to provide timely notice of the forgery to the bank.  The Court held that this extra-contractual defence, flowing from the Supreme Court of Canada's decision in CP Hotels v. Bank of Montreal, [1987] 1 S.C.R. 71 precluded D2 from setting up claims against the bank for the forgery or want of authority of the impugned cheques. Both principals of D2 had actual knowledge of the rogue principal's fraud and neither of them reported the fraud to Scotiabank in a reasonably prompt manner.

Lessons Learned

  1. Account Opening Procedures should follow "Invariable Standard Practices".  Always provide a copy of the Account Agreement at time of opening an account.  Maintain an indexed library of bank standard form agreements that were in use at any given time.
  2. Review and consider the language of the Account Agreements.  Is it clear and unambiguous?  Is it in need of a "start from scratch refresh" to ensure that it is comprehensive to all banking service channels offered and sets out the positive rights and duties of the bank and the customer?
  3. Investigate what the customer (or the principals of the customer) knew and when.  Actual knowledge of the forgery by a rogue principal may invoke a preclusion defence for a corporate customer.  Actual knowledge of other forgeries by the "innocent" principal can also be fatal to a claim. 

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