Canada: Pick Your Poison: Supreme Court Finds Bank Liable For Third Party Employee's Fraud

Last Updated: February 23 2018
Article by Kyle Kuepfer and Scott Venton

The Supreme Court of Canada has clarified the limits of a major defence available to banks who face liability for processing fraudulent cheques. In Teva Canada Ltd. v TD Canada Trust1, the Supreme Court held that banks who accept fraudulent cheques are required to repay the innocent drawer unless the bank can prove (a) that the company did not actually intend for the payee to receive the cheque, or (b) that the payee was neither a legitimate creditor of the company nor an entity that the company could have reasonably mistaken for a legitimate creditor.

In Teva, the Supreme Court was tasked with deciding which innocent party, the company or the bank, should bear the losses resulting from the misconduct of the company's employee. The employee had fraudulently requisitioned cheques payable to entities with similar or identical names of the company's real creditors. As a result of the employee's scheme, the company issued the requisitioned cheques and mechanically applied the appropriate signatures. The employee opened several bank accounts under the names of the payees of the fraudulent cheques. Over the course of three years, the employee deposited 63 fraudulent cheques totalling $5,483,249.40. These funds were later transferred to the employee's personal accounts2.

Section 20(5) of the Bills of Exchange Act

The only issue to be decided in Teva was the applicability of section 20(5) of the Bills of Exchange Act3, which provides banks with a defence to claims for conversion.

In general, a bank is liable for the tort of conversion when it negotiates a cheque and makes the proceeds available to someone other than the person rightfully entitled to payment. Conversion is a strict liability tort, meaning that the bank will be liable even if it was diligent and acted in good faith, and regardless of any negligence or carelessness of the drawer company.

Section 20(5) provides that a bank can validly negotiate a cheque (and avoid liability for conversion) when the cheque is made out to a payee who is "fictitious or non- existent", which is often the case in situations involving fraud. In theory, section 20(5) aims to protect banks from fraud committed by a third party against the drawer, including an insider in the drawer organization. The section allocates the loss to the drawer, who is typically better positioned to detect and discover the fraud internally4. Through the use of internal accounting processes and authorization policies, companies should be able to prevent the issuance of cheques to entities it is not indebted to or does not intend to pay.

The Supreme Court's Decision

At the Ontario Court of Appeal, the Court held that section 20(5) afforded the bank with a valid defence. Accordingly, the company had to bear the cost of its employee's fraud. Writing for a unanimous court, Justice Laskin reasoned that the payees were fictitious because the company was unable to prove that it intended the payees to receive the proceeds of the cheques5.

The Supreme Court overturned the Court of Appeal's decision. Writing for a 5-4 majority, Justice Abella rendered a decision that prioritizes consistency of judicial interpretations within the bills of exchange context. Relying on the Supreme Court's prior decisions in Boma Manufacturing Ltd. v CIBC6 and Royal Bank of Canada v Concrete Column Clamps (1961) Ltd.,7 Justice Abella reiterated, in clear terms, the analysis required to determine whether a payee can be considered fictitious or non-existent under section 20(5).

For a payee to be fictitious, the drawer must lack a subjective intention to pay the payee. In these situations, the cheque is not intended to reflect the payment of a genuine pre-existing debt. Rather, the payee's name is inserted "by way of pretence only".8 The drawer as a whole (and not just its rogue representative), must be subjectively aware that the cheque is being made out to a payee who the drawer does not intend to pay. Justice Abella concluded that in the absence of evidence to the contrary (i.e. an organizational intention that the cheque lacked commercial validity), the company's intention to pay the payee is presumed9.

If the bank cannot prove that the drawer did not subjectively intend to pay the payee, it may still rely on section 20(5) by demonstrating that the payee was non-existent. This is an objective analysis, which requires the bank to prove that the payee was neither (a) a legitimate creditor of the company, or (b) could not be reasonably mistaken for a payee with an established relationship with the drawer10. The idea behind this analysis is that drawers should be able to detect and prevent cheques from being made out to entities to whom it owes no debt.

In Teva, the bank was unable to prove that the payees were either fictitious or non-existent, despite the fact that the actual "payees" were merely creations of the fraudster employee who happened to share the same or similar names with legitimate creditors of the company. The payees were not fictitious as the company's intention to issue cheques to the entities was presumed to be genuine. The bank did not present evidence to dispute this presumption. The payees were not considered non-existent because they could be reasonabl mistaken as an entity with which the company had an established commercial relationship. As a result, section 20(5) did not provide a defence to the banks, who were liable for conversion.


Teva does not represent a major shift in the interpretation of the Bills of Exchange Act. Rather, Teva simply reiterates that the subjective intention of the drawer is a necessary consideration when apportioning liability for fraudulent cheques. Critics of this approach, including the dissenting justices, suggest that a focus on subjective intentions may cause uncertainty within Canada's bills of exchange system11. Absent a clear statement by the drawer that the impugned cheque was created to misrepresent the appearance of a genuine transaction, it is difficult to anticipate what evidence would satisfy the "fictitious" standard described by Justice Abella. On a few occasions, the dissenting justices commented on how cumbersome and impractical it would be to obtain such evidence12.

Nonetheless, the majority felt that, as the primary beneficiary of the bills of exchange system, banks should only escape liability for negotiating fraudulent cheques in a limited number of situations:

Banks are well-situated to handle the losses arising from fraudulent cheques, allowing those losses to be distributed among users, rather than by potentially bankrupting individuals or small businesses which are the victims of fraud.


If Parliament has concerns about the way this Court has balanced these complex policies, it is of course open to it to change the Act.13

In a particularly divergent opinion, the four dissenting justices expressed a strong concern with this rationale:

[w]ith respect, it is contrary to public policy to make bank customers the insurers against fraud for companies that fail to exercise effective control over the actions of their employees. Those very bank customers may themselves be small businesses or individuals. Moreover, small businesses are "in an excellent position to detect the fraud at an early stage and in that way minimize the loss" ...Encouraging them to do so is a more sound policy than asking bank customers to backstop sloppy management. 14

Regardless of the minority's unease, the majority decision in Teva confirms the difficult position that banks face with their customers. While cheque fraud can be limited through extra due diligence when opening accounts and through additional precautionary measures upon the receipt of cheques, these added safeguards are no certain to prevent fraud and may adversely affect customer relations. Although it may be possible for the banks to transfer liability for conversion to the drawer or drawee bank through creative contractual arrangements, these measures would likely be impractical from a business perspective.

The strict nature of liability for conversion combined with the Supreme Court's narrow application of section 20(5) make banks a target for companies who are victims of cheque fraud. While the extinction of paper-based payment systems may be on the horizon (and with it a reliance on more secure electronic systems), absent a legislative initiative to amend section 20(5), banks will continue to bear an increased risk related to third part cheque fraud for the foreseeable future.


1 2017 SCC 51 ["Teva"]

2 It is unclear whether the bank was able to recover any funds from the rogue employee.

3 RSC 1985, c B-4.

4 Rouge Valley Health System v TD Canada Trust, 2012 ONCA 17 at para 11; Bank of Nova Scotia v Toronto Dominion Bank (2001), 145 OAC 106 (ONCA), at para 15.

5 Teva Canada Ltd. v Bank of Montreal, 2016 ONCA 94, at para 87.

6 [1996] 3 SCR 727.

7 [1977] 2 SCR 456.

8 Teva, supra note 1 at para 51.

9 Ibid, at paras 52-53.

10 Ibid, at para 56.

11 Ibid, at para 80.

12 Ibid, at para 118.

13 Ibid, at paras 67, 71.

14 Ibid, at para 132. It is worth noting that many sophisticated companies are insured against cheque frauds committed by its employees. In situations where a bank was successful in defending an claim for conversion under section 20(5), it is likely that the losses would be distributed amongst the customers of the drawer's insurer in the form of increased premiums.

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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
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