Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd.

Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd.
Collection
Supreme Court Judgments
Date
1976-04-01
Report
[1977] 2 SCR 456
Judges
Laskin, Bora; Martland, Ronald; Judson, Wilfred; Ritchie, Roland Almon; Spence, Wishart Flett; Pigeon, Louis-Philippe; Dickson, Robert George Brian; Beetz, Jean; de Grandpré, Louis-Philippe
On appeal from
Quebec
Subjects
Bills of exchange
Decision Content
Supreme Court of Canada
Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., [1977] 2 S.C.R. 456
Date: 1976-04-01
The Royal Bank of Canada (Defendant) Appellant;
and
Concrete Column Clamps (1961) Ltd. (Plaintiff) Respondent.
1975: June 18; 1976: April 1.
Present: Laskin C.J. and Martland, Judson, Ritchie, Spence, Pigeon, Dickson, Beetz and de Grandpré JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR QUEBEC
Bills of exchange—Forged endorsement—Cheques to the order of former employees—“Fictitious person”—Liability of the bank—Bills of Exchange Act, R.S.C. 1970, c. B-5, ss. 21(5), 49.
For more than a year one Gingras, an employee of respondent who was responsible for paying the workmen, prepared about 1,000 cheques made payable to persons who were not entitled to them. He had them signed by an authorized officer of respondent, that is, an office employee who did not know the workmen personally. Gingras took the cheques and received the amounts on forged endorsements. Of the total amount of $94,206.14 cheques amounting to $26,736.01 were made out in the names of person whose identity never was traced, and cheques in the amount of $67,470.13 were made out in the names of former employees. The trial judge considered the cheques in the first category as made payable to fictitious persons, that is, payable to bearer in accordance with s. 21(5) of the Bills of Exchange Act, and held that the bank was not liable for them. He held, however, that appellant was liable for the sum of $67,470.13, although the payees were not entitled to the amounts entered on the cheques. This judgment was unanimously affirmed by the Court of Appeal of Quebec. Hence the appeal to this Court.
Held (Laskin C.J. and Dickson and Spence JJ. dissenting): The appeal should be dismissed.
Per Martland, Judson, Ritchie, Pigeon, Beetz and de Grandpré JJ.: The courts below applied the rule set forth by Falconbridge in Banking and Bills of Exchange, namely, that even if the drawer is induced to draw the bill by the fraud of some other person, the payee will not be considered to be fictitious if his name is the name of a real person. Moreover, all the recent Canadian cases have followed this rule and there is nothing which would justify this Court in doing other- wise. There is no reason to make a distinction, because in the case at bar the person authorized to sign the cheques mechanically placed his signature on them without knowing any of the payees personally. On the contrary, in an age when cheques are processed by computer, it is even more necessary to avoid facilitating fraudulent operations. This Court is not justified in changing the interpretation of our Bills of Exchange Act because legislation in other countries relieves banks of responsibility in similar cases.
Per Laskin C.J. and Dickson J., dissenting: It is more equitable that the employer, the drawer, should bear the loss rather than the drawee bank, unless it has been negligent or is otherwise precluded from invoking s. 21(5) of the Bills of Exchange Act. In the case at bar there is no negligence by the bank. The evidence indicates that the cheques presented for signature to the signing officer were signed in batches without verification, and the assertion of the trial judge that some of the payees were known to the drawer as being former employees to whom payment was intended can only be taken as a post facto conclusion arrived at by an examination of the cheques after the forgeries were discovered. No distinction can be drawn between the cheques payable to imaginary persons or persons who were not former employees and those who were formerly in the drawer’s employ. None of these were entitled to the proceeds of the cheques.
Per Spence J., dissenting: Each one of the cheques arrived in the bank for payment issued by the respondent and signed by a duly authorized signing officer of respondent company. It is quite impossible for the bank to make any investigation of the bona fide existence of any named payee, or of the fact that a debt was owed to that payee. On the other hand, it would have been quite easy in proper office management for respondent to have designed sufficient methods of checking and verifying to have defeated the employee’s scheme. In these circumstances, as a matter of proper administration of justice this Court should come to the conclusion that the loss should be payable by the employer and not by the bank acting in the ordinary course of its business in a manner which could not be criticized.
[Harley v. Bank of Toronto, [1938] 2 D.L.R. 135; Banque de Montréal v. Barbeau, [1963] Que. Q.B. 753; Zurich Life Insurance Co. of Canada v. Royal Bank of Canada (1973), 36 D.L.R. (3d) 750; Vinden v. Hughes, [1905] 1 K.B. 795; North & South Wales Bank Ltd. v. Macbeth, [1908] AC. 137, applied; Bank of England v. Vagliano Bros., [1891] A.C. 107, distinguished.]
APPEAL from a decision of the Court of Appeal of Quebec[1], affirming a judgment of the Superior Court ordering appellant to make payment. Appeal allowed, Laskin C.J. and Spence and Dickson dissenting.
David P. O’Brien and Robert P. Charlton, for the appellant.
Graham Nesbitt, for the respondent.
The judgment of Laskin C.J. and Dickson J. was delivered by
THE CHIEF JUSTICE (dissenting)—The issue in this appeal is a new one for this Court but an old one in the law of negotiable instruments. A payroll clerk, whose normal duty it is to prepare wage or salary cheques for employees of a company, perpetrates a fraud by including among the cheques presented to the authorized signing officer of the company a number of cheques payable to persons who were not owed any wages, some being former employees and the other such payees having names which may or may not be those of existing persons. The fraudulent clerk abstracts these cheques, forges the endorsements and obtains payment from the company’s bank which debits the company’s account accordingly. Who, as between the company and the bank should bear the loss?
In the present case, there were over 1,000 such cheques drawn, signed, endorsed and cashed over a period of one and one-half years before the fraud was discovered. None of the cheques was for an amount larger than $90. The total amount involved was $94,206.14, of which $67,470.13 was shown, as a result of subsequent investigation by the respondent company, to represent cheques made payable to former employees, and $26,736.01 represented the value of cheques to other non-entitled payees. Although the dishonest payroll clerk had a record of dishonesty in former employment, this was not known to the respondent company which had checked on one of his employment references and had obtained a satisfactory answer. Notice of the forged endorsements was given to the appellant bank within one year after they were discovered.
Two provisions of the Bills of Exchange Act, now R.S.C. 1970, c. B-5, are relevant to the disposition of this appeal. They are as follows:
21…
(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer.
49. (1) Subject to this Act, where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.
(2) Nothing in this section affects the ratification of an unauthorized signature not amounting to a forgery.
(3) Where a cheque payable to order is paid by the drawee upon a forged endorsement out of the funds of the drawer, or is so paid and charged to his account, the drawer has no right of action against the drawee for the recovery of the amount so paid, nor any defence to any claim made by the drawee for the amount so paid, as the case may be, unless he gives notice in writing of such forgery to the drawee within one year after he has acquired notice of the forgery.
(4) In case of failure by the drawer to give such notice within the said period, such cheque shall be held to have been paid in due course as respects every other party thereto or named therein, who has not previously instituted proceedings for the protection of his rights.
The trial judge, Collins J., came to the following conclusions on an assessment of the authorities:
The result of these cases appears to be that in determining whether a payee is fictitious or not, the intention of the drawer of the bill is the determining factor. The importance of sub-section 5 of Section 21 is that when applicable it dispenses legally but not practically with the necessity of the endorsement of the payee of such a bill, cheque or note. Such an endorsement is really superfluous and any holder for value or in due course, who is a bearer, can negotiate the bill and the person to whom the bill is negotiated gets the same title as the first bearer who acquired the bill in good faith for value.
…
After a most careful consideration, the Court has come to the conclusion that insofar as the payees of the said cheques were persons known to the plaintiffs being former employees and to whom the plaintiffs intended that those cheques should be paid when they were so signed, they were not fictitious persons. They were real persons and the plaintiffs intended that those persons should receive payment. The defendant was not entitled to charge such cheques against the accounts of the plaintiff companies.
With regard to the payees of the cheques who were not former employees of the plaintiffs and who were completely unknown to the plaintiffs and who existed probably only in the imagination of Gingras or whose names were perhaps taken by him out of a telephone directory or perhaps were the names of people he might have known some way, the fact is that those persons were non-existing as far as the plaintiffs, the makers of the cheques, were concerned. It is clear under the jurisprudence above quoted that theses cheques became payable to bearer. The defendant is entitled to charge the amount of such cheques against the accounts of the plaintiff companies.
In the result, he gave judgment for the plaintiff-respondent against the appellant bank in the sum of $67,470.13, with interest and costs. He rejected two contentions of the bank; first, that the intention of the dishonest payroll clerk should be attributed to his employer, and since the clerk’s intention was that the payees of the forged cheques should not obtain payment, the cheques should be considered as payable to fictitious persons; and second, a contention of negligence in engaging the dishonest payroll clerk.
The Quebec Court of Appeal unanimously affirmed the trial judgment, holding that with respect to cheques made payable to former employees, as being existing identifiable persons, the bank was liable under s. 49(1) for paying them on forged endorsements. There was no cross-appeal with respect to the other cheques for which the respondent company had been held chargeable by the appellant bank; nor was any issue with respect to these cheques raised in this Court.
Payroll-padding cases, of which the present is a classic illustration, may take a variety of forms. It may be the signing officer who introduces the spurious cheques, making them payable to order, taking delivery of them, and then cashing them on forged endorsements. It may be the signing officer conspiring with the payroll clerk, who makes up the cheques, obtains the authorized signature to them, and then cashes them on forged endorsements. Or, as was the case here, it may be the payroll clerk, acting on his own, who dupes the signing officer and executed the fraud to his own advantage. In contrast with the payroll-padding cases, there is the class of case where a cheque, properly made out to the order of an entitled payee and properly signed, is abstracted by a dishonest employee or stolen by a third person who obtains payment thereof on a forged endorsement. There is no doubt that in this kind of case, under Canadian law, the drawee bank must bear the loss.
This last-mentioned class of case does not involve any concern with s. 21(5) but only with s. 49. Where both provisions must be considered, the case-law in Canada, based as it was on English law at a time when Courts here were bound by judgments of the House of Lords, appears to point to a distinction between payees who are non-existent, treating this as a question of fact to be determined objectively, and payees who are fictitious, treating this in two ways; first, as pointing to payees who objectively are imaginary persons, and second, as pointing to payees who are real persons but who are not intended by the drawer to have any interest in the instrument.
This view of s. 7(3) of the English Bills of Exchange Act, the counterpart of s. 21(5) of the Canadian Statute, was a considerable modification of the common law rule which looked upon ficti- tiousness or non-existence subjectively according to the knowledge of the drawer. Although the first of the leading English cases on the matter, Bank of England v. Vagliano Bros.[2], has been treated as requiring an objective test to be applied (see, for example, Falconbridge, Banking and Bills of Exchange (7th ed., 1969), at p. 481; Abel, “The Impostor Payee” [1940] Wise. L. Rev. 161, at p. 165n), later cases have shown that this is not invariable since account has been taken of the knowledge and intention of the drawer.
Indeed, Vagliano’s case itself stands on no clear objective base, and it was, moreover, unusual in its facts, involving a purported bill of exchange where the drawer’s signature was forged, the acceptor’s was obtained by fraud and payment was obtained on a forged endorsement of the payee’s name by a clerk of the acceptor who set up the entire course of the fraud. In holding (and reversing the courts below) that the acceptor’s bank could properly debit the amount of the bill against the acceptor’s account, the House of Lords treated the bill as payable to a fictitious person and therefore as being a bearer bill even when presented for payment by the dishonest clerk. It did this on the footing that the payee was not intended by the drawer to have any interest in or right under the bill and that the acceptor’s want of knowledge that the payee was “fictitious” did not alter the situation.
I must confess to great difficulty in understanding how fictitiousness could be found in the Vagliano case. Looking at the entire transaction, the better conclusion appears to be that estoppel of the acceptor was the prompting consideration. Indeed, this emerges from Lord Halsbury’s reasons, but reliance in later cases was placed on an obervation of Lord Herschell (at p. 153) that “whenever the name inserted as that of payee is so inserted by way of pretence merely, without any intention that payment shall only be made in conformity therewith, the payee is a fictitious person within the meaning of the Statute, whether the name be that of an existing person or of one who has no existence and that the bill may in each case be treated by a lawful holder as payable to bearer”. This formulation appears to me to require a consideration of someone’s intention, presumably that of the drawer of a cheque or the acceptor of a bill. In the Vagliano case, the acceptor (albeit so induced by fraud) intended that payment be made to the designated payee, who was known to the acceptor to be a real person, and yet the payee was held to be fictitious. A contrary result was reached in Vinden v. Hughes[3], much relied on by the respondent herein to support the result reached by the Quebec Court of Appeal, and yet also relied on by the appellant bank for what was said in the course of the reasons in that case.
Vinden v. Hughes is, on its facts, the present case, making allowance only for a slight difference in that there customers of the defrauded firm were shown to be payees while here they were former employees. So far as the signing officers were concerned, the intention there and here was the same, namely, to issue cheques to persons believed to be existing creditors. Warrington J. in Vinden v. Hughes distinguished Vagliano’s case on the ground that “there being no drawer in fact the use of a name as payee was a mere fiction, although the payee actually existed” (at p. 801). The situation was different, according to Warrington J., where it was “the case of the drawer of the document intending to issue the document and intending to issue it with the name of the particular payee upon it, that payee not being non‑existent” (also at p. 801). The appellant bank contends that as a result of Vinden v. Hughes and later cases, such as North and South Wales Bank Ltd. v. Macbeth[4], the knowledge as well as the intention of the drawer is material, and it relies on the following statement in Halsbury’s Laws of England (4th ed., vol. 4, 1973), at p. 144 as a current summation of the law:
But where an instrument is made payable to a person known by the drawer to be an existing person and intended by the drawer to be the payee, such a person is not to be deemed fictitious, even although the signature of the drawer has been obtained by fraud.
Both the observation of Lord Herschell in Vagliano’s case and its adoption and application in Vinden v. Hughes indicate at least a partial return to a subjective test of whether a bill or cheque falls within s. 21(5). It has not gone all the way, however, because where the payee is in fact non-existing, the leading English case treats the cheque as payable to bearer although the drawer believed that it was for an existing person and intended to pay such a person. In Glutton v. Attenborough[5], a dishonest clerk induced his employer, the appellant, to make out cheques to one George Brett. There was in fact no such person but the clerk endorsed the cheques in that name and negotiated them with the respondents who took them for value and in good faith. Having obtained payment from the appellant’s bankers, the respondents successfully resisted recovery by the appellant by reliance on the English equivalent of s. 21(5).
I observe here that in the United Kingdom, unlike Canada, the drawee bank which pays cheques in good faith but on forged endorsements is protected by s. 60 of its Bills of Exchange Act which has no parallel in Canada where, indeed, the opposite result is prescribed by s. 49. Thus, for example, in Vinden v. Hughes it was not the drawer’s bank which was successfully sued but the person to whom the cheques were negotiated for value by the dishonest clerk and who thereupon obtained payment from the drawer’s bank. So too, in North and South Wales Bank Ltd. v. Macbeth, (supra), recovery by the defrauded plaintiff drawer was from the bank of the person who by fraud induced the drawing of a cheque in favour of another and then obtained payment from his bank on a forged endorsement. Clutton v. Attenborough is another illustration of the effect of s. 60 of the United Kingdom Act.
If the intention of the drawer is to govern in determining, in the padded payroll cases, whether the payee is to have an interest in the cheque, and, consequently, whether the cheque will or will not be treated as payable to bearer, I can see no reason in principle to protect the drawee bank where the payee is in fact non-existent and yet to hold it liable for paying on a forged endorsement where the intended payee is in fact an existing person. Subject to the relevance of the knowledge of the drawer (or the signing officer) at the time the cheque is issued, that is at the time the fraud is perpetrated, the discovery of the real or imaginary character of the payee is post facto; and ordinarily the drawer, induced by the fraud, would intend that the cheque take its effect in favour of the named payee. In short, in the fictitious or nonexistent payee cases, I see no basis for treating them in different ways according to objective fact, discovered after the event, if the central question is, as I believe it to be, whether the drawer or signing officer of the drawer intended (as is generally the case) to have the cheques (issued as a result of a payroll clerk’s fraud) take effect according to their tenor. This would, in view of s. 49 of the Canadian Act, place the loss on the drawee bank.
The critical question that arises, on the submission made by the appellant, is whether, the fraud being established, it is necessary to show that the drawer or signing officer knew of the existence of the payee in order to impose liability on the bank. The bank will, of course, escape liability if it is shown that the drawer or signing officer knew of the fraud when issuing or signing the cheques. But if he did not, and issued the cheques to the designated payees in the ordinary course of his duties, does the fact of fraud require that he be shown to have knowledge of the existence of the payees before liability will rest on the bank paying the cheques on forged endorsements? Such knowledge, if a prerequisite to the drawee bank’s liability, could not be expected to be personal where, as here, hundreds of employees are involved but could be based on a required reference to a payroll list kept by the signing officer, although even on this basis there could be a possibility of the fraud being carried into that list.
The submission of the appellant bank is an appeal for the adoption of a policy of placing the risk of loss from payroll-padding upon the employer as a risk of the business, the risk of loss being one that is normally covered by fidelity insurance carried by the business as a normal expense. The contention is that in balancing the elements involved in the payroll-padding cases, the balance should be struck in favour of giving protection to the bank by treating the cheques resulting from the padding as payable to bearer unless the drawer or signing officer is shown to have knowledge of the existence of the payees. The bank concedes its liability if it pays on a forged endorsement where a cheque payable to order is stolen; it urges the unfairness of requiring it to assume liability as well in cases where a faithless employee induces the issue of cheques to payees, whether real or not, who are not intended by the dishonest employee to take any interest and where the signing officer does not know of the existence of the payees. The bank urged, in effect, that there should be no difference between the case where the signing officer himself issues “fictitious” cheques and where the cheques are made out by one employee in large numbers and put for signature before another to whom the payees are unknown: see, generally, Comment, “The Fictitious Payee and the UCC—The Demise of a Ghost” (1951), 18 U. of Chi. L. Rev. 281.
I wish to examine Canadian case law on the subject under discussion as it has evolved before and after Vagliano’s case. A convenient starting point is Agricultural Savings and Loan Association v. Federal Bank[6]. This case was decided before the enactment of the Bills of Exchange Act by 1890 (Can.), c. 33 but after the enactment in the United Kingdom of the predecessor of s. 60 of its Bills of Exchange Act. It concerned a fraud perpetrated upon the plaintiff loan company by one S, who applied for a loan in the names of J.T.B. and I.B. upon a forged mortgage of land which they owned, and who obtained the cheques for the loan and cashed them on forged endorsements of the names of the payees followed by endorsement of his own name. The decision in favour of the plaintiff against the drawee bank was argued mainly on the issue of alleged negligence of the plaintiff and its agent, who helped prepare the loan application but was not himself party to the fraud. In the course of the reasons in the Ontario Court of Appeal, affirming the judgment at trial and rejecting the contention that there was negligence in respect of the cheque transaction, reference was made by Osier J.A. to the contention that the cheques must be looked upon as payable to bearer because payable to a fictitious person. He dealt with this as follows (at p. 201):
That would be so if it had been the intention of the plaintiffs to use the name of a fictitious payee. But on the contrary the payees were existing persons with whom the plaintiffs believed they were dealing and whose endorsement they relied upon having before the cheques were paid.
The foregoing case was in substance a case where a fraud was practised upon a loan company by a third person who used the names of registered land-owners, and by forgery made off with the loan money advanced by cheques made out to the landowners. It was hence a class of case where, in the absence of protective legislation found in s. 60 of the United Kingdom Act, the drawee bank must answer for paying on forged endorsements. Moreover, it is consistent with the later observation of Lord Herschell in Vagliano’s case because the drawer did not use the payees’ names by way of pretence but rather by way of an intention that payment be made accordingly.
London Life Insurance Co. v. Molsons Bank[7], also a judgment of the Ontario Court of Appeal, was decided just before Vinden v. Hughes and purported to apply Vagliano’s case in coming to a decision contrary to that reached in Vinden v. Hughes. It was held in the Molsons Bank case that cheques procured by a dishonest insurance officer to pay policy claims were, in the circumstances, payable to fictitious or non-existent persons, and hence the drawee bank, in paying in good faith but on forged endorsements, was entitled to charge the insurer’s account with the amounts of the cheques. The dishonest officer had sent in fictitious applications for insurance, kept the policies alive and then represented that the insured had died, sent claim papers to the head office and procured the issue of cheques in the stated names of the claimants. After saying that the insurer intended the cheques for the named payees, Maclennan J.A., speaking for the majority of the Court, held that the transactions were entirely fictitious as they were in Vagliano’s case, although there were real persons whose names were used by the faithless insurance officer. Maclaren J.A., in a concurring judgment, noted that there was a change in the law upon the enactment of the Bills of Exchange Act “which does not require that the fact of the payee being a fictitious or non-existing person should be to the knowledge of any of the parties”. This is a statement of the objective test said to be expressed in Vagliano’s case but it does not square with the result any more than it did in Vagliano’s case.
Much akin to the Molsons Bank case is Metropolitan Life Insurance Company v. Quebec Bank[8], where an insurance company employee forged insurance claims, and when cheques were issued to the beneficiaries he obtained possession of them and cashed them on forged endorsements. The Quebec Superior Court applied Vagliano’s case in holding that although the names of real, existing persons were used in the specification of the payees of the cheques, the cheques should be treated as payable to bearer. The Court acted also on a point taken in the Molsons Bank case, namely, that the designated payees could not honestly cash the cheques when they had given no consideration for them. In the Molsons Bank case the point was put more strongly, and it was contended by the bank in the present case that here, similarly, the payees could not honestly and without fraud endorse the payroll cheques and, further, that the signing officer was not shown to know of the existence of those payees. Of course, in no case where a fraud of the kind involved here is perpetrated could any payee honestly endorse a cheque made payable to his order. From this, counsel for the bank urged that it is only if the signing officer knows that the payee is a real person and intends him to be the payee, albeit his signature to the cheque is procured by fraud, that the drawee bank is liable if it pays on a forged endorsement.
If the Molsons Bank case be regarded as Ontario’s Vagliano case, later Ontario cases and others in this country have rested more generally on Vinden v. Hughes. In Harley v. Bank of Toronto[9], an employee of the plaintiff stockbrokers led his employers to believe that he could get business from a well-known grain trader and carried out some transactions, alleged to be for that trader, which proved to be successful. Cheques were drawn in the trader’s name which was forged by the employee who cashed them by further endorsing them in his own name. The Ontario Court of Appeal, affirming the trial judge who distinguished both the Vagliano case and the Molsons Bank case (the latter on the ground that the beneficiaries of the policies were not known to the drawer), also took the view that neither the Vagliano case nor the Molsons Bank case should be applied. It relied rather on Vinden v. Hughes, and adopted as the governing principle Lord Lore- burn’s approval in North and South Wales Bank Ltd. v. Macbeth, supra, of what Bray J. said at trial in that case, namely, “when there is a real drawer who has designated an existing person as the payee and intends that that person should be the payee, it is impossible that the payee can be fictitious”.
The Ontario Court of Appeal appears to have gone to a strictly post facto objective test of the existence of the payee, but the trial judge in the Harley case, Macdonell Co. Ct. J., was more troubled than the Court of Appeal seemed to be by the question of knowledge of the existence of the payee. In distinguishing the Molsons Bank case on the ground that the payees there were not known to the drawer, he assested that the grain trader was known to the drawer, not personally (no more than was the then President of the United States) but in the sense that he was well-known to be an active grain trader by all in the business (and so too was the President well-known in a general sense). The issue thus raised by the reasons of the trial judge and by those of the Court of Appeal must be seen in the light of the fact that in the Macbeth case, upon which the Harley case relied, the named payee, although never seen by the drawer, was known to him (presumably in the same sense as in Harley) and intended by him, albeit as a result of fraud, to have the proceeds of the cheque: see Buckley L.J. in [1908] 1 K.B. 13, at p. 22, and Lord Robertson in [1908] A.C. 137, at p. 140.
On the facts, Harley v. Bank of Toronto is a case where the bank was held liable because the payee, far from being fictitious or non-existing, was a person known to the drawer and intended by him to receive the proceeds. If the question of the existence of the named payee is to be ascertained post facto, without reference to the knowledge of the drawer at the time of issue of the cheques, should not the intention of the drawer as to payment also be determined post facto? If that were the case, there would be no doubt that he would not intend payment to a person not entitled thereto.
The Quebec Court of Appeal purported to apply the Harley case in Banque de Montréal v. Barbeau[10], a case far removed from the Harley case on its facts. In the Barbeau case, a fraudulent agent obtained a cheque from Barbeau as a deposit on the purchase of a small building from the owner who was falsely alleged by the agent to be one Leo Maher. The agent brought an acceptance of Bar-beau’s offer to purchase signed in the name of Leo Maher. Thereupon the agent went to the drawee bank accompanied by one Leo Maheu, had the cheque certified and then went to the appellant Bank of Montreal where he presented the cheque for payment after endorsing it in the name of Leo Maher. When asked who was Leo Maher he pointed to Maheu who was standing by, and the cheque was cashed when a relative of the fraudulent agent and employed by the bank, vouched for him.
I am unable to appreciate how the Harley case is of assistance in the Barbeau case where it was clear that the payee was not known to the drawer other than as a mere name. In the Barbeau case, as in the judgment of the Quebec Court of Appeal in the present case, reliance was placed on the summation of the case law on fictitious or non-existing payees as set out in Falconbridge, Banking and Bills of Exchange (and I refer to the current 7th ed. 1969), at pp. 485-486, as follows:
In the case of a bill drawn by Adam Bede upon John Alden payable to Martin Chuzzlewit, the payee may or may not be fictitious or non-existing according to the circumstances:
(1) If Martin Chuzzlewit is not the name of any real person known to Bede, but is merely that of a creature of the imagination, the payee is non-existing, and is probably also fictitious.
(2) If Bede for some purpose of his own inserts as payee the name of Martin Chuzzlewit, a real person who was known to him but whom he knows to be dead, the payee is non-existing, but is not fictitious.
(3) If Martin Chuzzlewit is the name of a real person known to Bede, but Bede names him as payee by way of pretence, not intending that he should receive payment, the payee is fictitious but is not non-existing.
(4) If Martin Chuzzlewit is the name of a real person, intended by Bede to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that Bede has been induced to draw the bill by the fraud of some other person who has falsely represented to Bede that there is a transaction in respect of which Chuzzlewit is entitled to the sum mentioned in the bill.
It is the fourth proposition in the summary aforesaid that applies to the padded payroll cases. Curiously enough, in my view, although knowledge runs through the first two propositions and knowledge and intention run through the third, knowledge is dropped from the fourth. Knowledge, at least in the sense of awareness of the existence of the payee and who he was, existed in the Vagliano case and, similarly, in the Macbeth case. In those cases, there was but one payee and, although, in Vinden v. Hughes there were twenty-seven cheques payable to various creditor customers of the drawer, yet, on the facts, it appears (according to the submissions of the drawer’s counsel) that the payees were all well-known customers of the drawer. It seems to me that the fourth proposition in Falconbridge, supra, assumes knowledge of the existence of the payee, although this is not made explicit.
Harley v. Bank of Toronto was applied by the Ontario Court of Appeal in Bank of Toronto v. Smith[11], a rare instance in our case law of a fraudulent procurement of a cheque by an impostor who cashed it on a forged endorsement. The question whether the cheque was payable to a fictitious or non-existent person within s. 21(5) of the Bills of Exchange Act was determined by applying the rationale of Vinden v. Hughes and of the Macbeth case. It was held that because the drawer intended the named payee to receive the proceeds of the cheque (although the name was used to perpetrate the fraud), the instrument was not payable to a fictitious or non-existing person. Three fairly recent cases in Canadian Courts, one in British Columbia’s Supreme Court and two in the Quebec Courts (in the Superior Court and in the Court of Appeal respectively) deserve some mention. Zurich Life Insurance Co. of Canada v. Royal Bank of Canada[12] was a case where an employee of an insurer fraudulently requested in the name of an insured, withdrawal of part of some money which had been deposited to answer for future premiums. The dishonest employee misappropriated and cashed, on forged endorsements of the payee’s name and his own, the cheque issued by the insurer in compliance with the withdrawal request. The cheque carried a statement that personal endorsement of the payee was required, and one of the grounds of decision against the bank was its failure to verify the endorsement of the payee and the dishonest employee’s authority in respect of banking transactions of the insurer. The Court, however, also founded itself on Harley v. Bank of Toronto, holding that there being a real drawer who intended to pay the named payee, the matter was concluded against the bank’s contention that the cheque could be treated as payable to bearer.
The two Quebec cases deal with issues that had not been dealt with in earlier English and Canadian cases, namely, vicarious liability and burden of proof. The later of the two cases, Banque Royale du Canada v. Manufacturers Life Insurance Co. et Ménard[13], concerned a fraud practised by an agent of the insurer on Ménard who had turned over a large sum of money in cash and bonds to the agent to buy endowment policies for Ménard’s children, the payments to begin in twenty years. On its agent’s advice, the insurer began to issue cheques to the children immediately and the cheques were delivered to the agent who forged the endorsements. In rejecting the bank’s contention that the cheques should be treated as payable to bearer, the Court refused to attribute the intention of the agent to his employer, although he was the person on whose advice the employer acted, and contended itself with an affirmation that the case was governed by Vinden v. Hughes where, so far as the reasons disclose, the agency issue was not considered.
The second Quebec case is Bromont Inc. v. Banque Canadienne Nationale[14], a judgment of Nolan J. It is important on two counts. It affirms, in the first place, that where the payroll fraud is perpetrated by an authorized co-signer of a company’s cheques, the second required signature being given as a formality on his request, the drawee bank is protected. Clearly, in the language of some of the cases, the dishonest co-signer never intended that the named payees should obtain the proceeds, even though they were existing persons. The second reason for the importance of the case is in the following statement on burden of proof (at p. 970):
In any event the Court feels that where the drawer of a cheque payable to order seeks to recover from the drawee the amount which the latter paid out of the funds of the drawer upon a forged endorsement, the drawer should have the burden of proving not only that the cheque was made payable to an existing person but also that it was intended that the designated payee would get the proceeds of the cheque…
Obviously, this burden could not be discharged on the facts of the Bromont case.
Nolan J.’s view of the burden of proof is couched in terms which go beyond the state of facts which were before him. Since it would be unlikely that the drawer of numerous payroll cheques would know of the existence of the named payees except through the assurance of someone responsible for making up the payroll, a required offer of proof that the payees are existing persons, to whom the drawer intended the proceeds of the cheques should go, could mean that the fraudulent payroll clerk’s knowledge of who were the payees would be attributed to the drawer. What of intention? The drawer, if not involved in any fraud, would of course intend that existing persons get the proceeds of the cheques but that would not be the fraudulent payroll clerk’s intention. Is his intention also to be attributed to the drawer?
Strangely enough, in none of the leading cases in England and in