Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce

Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce
Collection
Supreme Court Judgments
Date
1996-11-21
Report
[1996] 3 SCR 727
Case number
24520
Judges
Lamer, Antonio; La Forest, Gérard V.; L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
British Columbia
Subjects
Bills of exchange
Notes
SCC Case Information: 24520
Decision Content
Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727
Boma Manufacturing Ltd. and Panabo Sales Ltd. Appellants
v.
Canadian Imperial Bank of Commerce Respondent
Indexed as: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce
File No.: 24520.
1996: March 26; 1996: November 21.
Present: Lamer C.J. and La Forest, L’Heureux‑Dubé, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for british columbia
Bills of exchange ‑‑ Cheques ‑‑ Conversion ‑‑ Defences ‑‑ Companies’ bookkeeper issuing series of fraudulent cheques payable to third parties and depositing them to her bank accounts ‑‑ Bookkeeper forging payees’ signature on certain cheques ‑‑ Other cheques accepted by collecting bank without endorsement ‑‑ Whether collecting bank liable to companies for conversion ‑‑ Whether cheques payable to fictitious or non‑existing person ‑‑ Whether collecting bank holder in due course ‑‑ Bills of Exchange Act, R.S.C., 1985, c. B‑4, ss. 20(5) , 165(3) .
The appellants, two small, family‑owned companies whose only shareholders and officers are M and his wife, were defrauded by their bookkeeper A through a series of fraudulent cheques issued over a five‑year period. A, along with the two principals, was a duly authorized signing officer on the bank accounts maintained by the companies. Cheques drawn on these accounts required only one authorized signature. A used the appellants' pre‑printed cheque forms to create some 155 cheques totalling $91,289.54, payable to a number of persons connected with the appellants, including the principals, several employees, and one of the subcontractors, Van Sang Lam (all but one of the cheques payable to Lam were made to "J. Lam" or "J. R. Lam", the initials and the last name mimicking the name of A's first husband). A signed 146 of the cheques on behalf of the appellants, and fraudulently obtained M's signature on the other nine. She deposited all the cheques into one of her accounts at the respondent bank. The respondent bank’s policy with respect to a customer wishing to deposit a third party cheque to her account was to require that the cheque be endorsed by the payee. However, the bank accepted 107 of the cheques payable to "J. Lam" or "J. R. Lam" for deposit without endorsement. The tellers apparently assumed that the payee was A’s first husband. A forged endorsements on some of the Lam cheques, and on all of the cheques payable to other third parties. The appellants brought an action in negligence, and in the alternative, conversion, against their own bank and against the respondent. They were successful at trial, and the respondent was ordered to pay $91,289.54. A majority of the Court of Appeal allowed the respondent’s appeal, reducing the judgment so as to reflect only the amount of the nine cheques bearing M's signature.
Held (La Forest and McLachlin JJ. dissenting on the appeal): The appeal should be allowed and the cross‑appeal dismissed.
Per Lamer C.J. and L’Heureux‑Dubé, Sopinka, Gonthier, Cory, Iacobucci and Major JJ.: A bill of exchange is a chattel that can be negotiated from party to party. Title to a bill, such as a cheque, is obtained through negotiation. Once an individual has obtained title, that individual has the right to present the bill to the drawee for payment, as well as a right of recovery against the drawer if the bill is dishonoured by the drawee. If a bank pays to its customer the amount of a cheque to which that customer is not entitled, the bank will be strictly liable to the owner of the cheque for conversion. As a matter of principle contributory negligence is not available in the context of a strict liability tort. If the contributory negligence approach is to be introduced into this area of the law, it must be at the instance of the legislative branch.
The respondent is prima facie liable to the drawer for conversion in this case. The general rule is that a forged or unauthorized endorsement is wholly inoperative, and no right to retain the bill or to enforce payment thereof can be acquired through or under such a signature. An exception to this rule appears in s. 20(5) of the Bills of Exchange Act , which provides that a bill payable to a fictitious or non‑existing person may be treated as payable to bearer. A cheque payable to bearer can be negotiated by simple "delivery" to the bank; endorsement is not required. If the cheques in question were payable to fictitious persons, and could accordingly be treated as bearer cheques, the bank would become a "holder in due course" pursuant to s. 73 of the Act despite the forged and missing endorsements and would consequently have a defence against liability for conversion. The policy underlying the fictitious person rule seems to be that a drawer who has drawn a cheque payable to order, not intending that the payee receive payment, loses, by his or her conduct, the right to the protections afforded to a bill payable to order.
Many of the cheques in question were payable to "real" persons, albeit persons to whom no money was owed by the companies. Because A, the writer of the cheques, did not intend these payees to receive the proceeds of the cheques, the Court of Appeal concluded that the drawer of the cheques intended them to be payable to bearer. The Court of Appeal erred in focussing on A’s intention. It is the intention of the drawer that is significant for the purpose of s. 20(5) , not the intention of the signatory of the cheque. A is not the drawer because she cannot be said to be the guiding mind of the corporate appellants; she simply had signing authority within limited circumstances. The relevant intention in this case is that of the appellant companies, as expressed by their guiding mind.
Where a drawer is fraudulently induced by another person into issuing a cheque for the benefit of a real person to whom no obligation is owed, the cheque is to be considered payable to the payee and not to a fictitious person. Here the cheques payable to actual persons associated with the appellants were not payable to fictitious persons, and could not be treated by the respondent bank as payable to bearer. While many of the cheques were made payable not to actual persons associated with the companies, but to "J. Lam" and "J. R. Lam", M was reasonably mistaken in thinking that the payee was an individual associated with his companies. These cheques thus could not be treated by the respondent bank as payable to bearer. While the cheques certainly were "delivered" by A to the respondent bank within the meaning of s. 2 of the Act, for negotiation to be effected endorsement by the payee was required.
Under s. 165(3) of the Act, a bank that collects a cheque for deposit to the credit of a person and that credits that person with the amount of the cheque acquires all the rights and powers of a holder in due course of the cheque. The “person” in this section means a person who is entitled to the cheque. Consequently, s. 165(3) does not apply to the facts of this case. A was not the payee or a legitimate endorsee of the cheques in question, and accordingly she was not a "person" within the meaning of s. 165(3). Absent valid endorsements, the cheques were not validly negotiated to the bank. As a result, the respondent bank took the cheques subject to the equities of the situation. A was not entitled to the cheques, but the respondent bank credited her with the amount of those cheques. This constitutes conversion, for which the bank is strictly liable.
Per La Forest and McLachlin JJ. (dissenting on the appeal): The underlying conflict that arises when trying to decide the scope and application of s. 20(5) of the Bills of Exchange Act is that of the allocation of loss as between the accepting bank and the drawer of a fraudulent cheque. This conflict becomes ripe when it is an employee of the drawer, or a third person, who perpetrates the fraud and the loss must be borne by one of two innocent parties. As between the employer/drawer and the accepting bank, the employer/drawer should bear the risk of any loss and is in the best position to minimize that risk. As demonstrated by the facts of this case, it is easy enough for the perpetrator to forge the endorsement of the named payee and there is no way for the bank to verify the authenticity of the signature. On the other hand, the employer/drawer is in a much better position to put a stop to fraud of this type and is at least in an equal position to bear any loss. As a matter of course, any risk of loss on the part of a large corporation is generally covered by fidelity insurance. It is also possible for large‑scale fraud to be discovered through audits or other protective measures. Allocating the loss to the accepting bank removes all incentive from a corporation to pursue business practices that will minimize such losses. Furthermore, such an allocation does not fit in well with the general scheme of bills of exchange, since the essence of a bill of exchange is its negotiability and the finality of payment inherent to such a negotiation.
Of the 155 fraudulent cheques, 41 were made out to existing employees of the appellants. With respect to the three cheques out of the 41 which A fraudulently produced and then induced M to sign, the respondent bank’s defence under s. 20(5) must fail in light of this Court’s decision in Concrete Column Clamps. However, the remaining 38 cheques prepared and signed by A, and payable by way of pretence to employees of the appellants, are payable to fictitious persons within the meaning of s. 20(5) of the Act and consequently must be treated as payable to bearer. The respondent bank is a holder in due course of these cheques and cannot be liable to the appellants for conversion. The application of the law of agency leads to the inevitable conclusion that where the fraudulent employee is a signing officer of the drawer, then his or her intent must be taken as being the intent of the drawer. While A clearly acted beyond the ambit of what the appellants had in mind when she prepared and signed cheques made out to payees who were not their creditors, it is equally clear that to the eyes of a third party she would have had the apparent authority to sign the cheques as she was an acknowledged signing officer of both companies. The intent of A is thus also the intent of the appellants, the drawer of the cheques. Assuming it is possible to do so, this is not an appropriate case for apportionment.
The test for a non-existent person under s. 20(5) is an objective one and involves a determination of whether the payee is a matter of invention and not a real person. The 114 cheques payable to D. Lam, J. Lam or J. R. Lam were payable to non‑existent persons within the meaning of s. 20(5) and are therefore to be treated as payable to bearer. The respondent bank is accordingly a holder in due course of these cheques and has a complete defence against the action of the appellants. Section 165(3) should be given the interpretation adopted by Iacobucci J. both to avoid disharmony with the general scheme for cheques set out in the Act and to prevent injustice, and is thus not available as a defence to the respondent bank on the facts of this case. Since the respondent did not cross‑appeal with respect to the application of s. 20(5) , the judgment of the Court of Appeal should stand as is.
Cases Cited
By Iacobucci J.
Distinguished: Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, [1982] 2 S.C.R. 488; disapproved: Toronto‑Dominion Bank v. Dauphin Plains Credit Union Ltd. (1992), 98 D.L.R. (4th) 736; referred to: Number 10 Management Ltd. v. Royal Bank of Canada (1976), 69 D.L.R. (3d) 99; Marfani & Co. v. Midland Bank, Ltd., [1968] 2 All E.R. 573; Jervis B. Webb Co. v. Bank of Nova Scotia (1965), 49 D.L.R. (2d) 692; Ontario Woodsworth Memorial Foundation v. Grozbord, [1969] S.C.R. 622; Norwich Union Fire Insurance Society Ltd. v. Banque Canadienne Nationale, [1934] S.C.R. 596; Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., [1977] 2 S.C.R. 456; Bank of England v. Vagliano Brothers, [1891] A.C. 107; Gough Electric Ltd. v. Canadian Imperial Bank of Commerce (1986), 34 B.L.R. 17; Royal Bank of Canada v. Wild (1974), 51 D.L.R. (3d) 188.
By La Forest J. (dissenting on the appeal)
Bank of England v. Vagliano Brothers, [1891] A.C. 107; Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., [1977] 2 S.C.R. 456; Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, [1982] 2 S.C.R. 488; Vinden v. Hughes, [1905] 1 K.B. 795; Harley v. Bank of Toronto, [1938] 2 D.L.R. 135; London Life Insurance Co. v. Molsons Bank (1904), 8 O.L.R. 238; Metropolitan Life Insurance Co. v. Quebec Bank (1916), 50 C.S. 214; Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd., [1979] 2 S.C.R. 787; Clutton v. George Attenborough & Son, [1897] A.C. 90; Grey v. Pearson (1857), 6 H.L.C. 60; Caledonian Railway Co. v. North British Railway Co. (1881), 6 App. Cas. 114.
Statutes and Regulations Cited
Bills of Exchange Act, R.S.C., 1985, c. B‑4, ss. 2 “bearer”, “delivery”, “endorsement”, “holder”, 20(2), (3), (4), (5), 38, 39(1)(a), (2), 48(1), (3), 49(1), 55(1), 59, 73, 165(3).
Bills of Exchange Act, 1882 (U.K.), 45 & 46 Vict., c. 61, s. 60.
Bills of Exchange Act, 1890, S.C. 1890, c. 33, s. 21.
Authors Cited
Canada. Law Reform Commission. The Cheque: Some Modernization. Ottawa: The Commission, 1979.
Crawford and Falconbridge, Banking and Bills of Exchange: A Treatise on the Law of Banks, Banking, Bills of Exchange and the Payment System in Canada, 8th ed. By Bradley Crawford. Toronto: Canada Law Book, 1986.
Dictionary of Canadian Law, 2nd ed. Scarborough, Ont.: Carswell, 1995, “drawer”.
Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.
Falconbridge, John Delatre. Banking and Bills of Exchange, 6th ed. Toronto: Canada Law Book, 1956.
Geva, Benjamin. “The Fictitious Payee and Payroll Padding: Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd.” (1977‑78), 2 C.B.L.J. 418.
Martin, Sheilah L. “Section 165(3) of the Bills of Exchange Act ” (1985-86), 11 C.B.L.J. 23.
Ogilvie, M. H. Canadian Banking Law. Scarborough, Ont.: Carswell, 1991.
Ogilvie, M. H. “Should the Collecting Banker Be the Drawer's Insurer?: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce” (1994), 9 B.F.L.R. 227.
Rafferty, Nicholas. “Forged Cheques: A Consideration of the Rights and Obligations of Banks and Their Customers” (1979‑80), 4 C.B.L.J. 208.
Scott, Stephen A. “The Bank is Always Right: Section 165(3) of the Bills of Exchange Act and its Curious Parliamentary History” (1973), 19 McGill L.J. 78.
APPEAL and CROSS‑APPEAL from a judgment of the British Columbia Court of Appeal (1994), 99 B.C.L.R. (2d) 201, 120 D.L.R. (4th) 250, [1995] 2 W.W.R. 435, 52 B.C.A.C. 161, 86 W.A.C. 161, 19 B.L.R. (2d) 166, varying a judgment of the British Columbia Supreme Court (1993), 81 B.C.L.R. (2d) 197, [1993] 7 W.W.R. 368, allowing the appellants’ action in damages. Appeal allowed, La Forest and McLachlin JJ. dissenting, and cross‑appeal dismissed.
Bruce B. Clark, for the appellants.
Keith E. W. Mitchell and H. Rhys Davies, for the respondent.
The judgment of Lamer C.J. and L’Heureux‑Dubé, Sopinka, Gonthier, Cory, Iacobucci and Major JJ. was delivered by
1. Iacobucci J. -- In the main, this appeal raises issues concerning the tort of conversion with respect to cheques, the meaning of fictitious or non-existing persons in s. 20(5) of the Bills of Exchange Act, R.S.C., 1985, c. B-4 (the "Act "), and the defence of a holder in due course under s. 165(3) of the Act .
I. Background
2. The appellants Boma Manufacturing Ltd. and Panabo Sales Ltd. are associated companies in the business of manufacturing and marketing small souvenir items. The only shareholders and officers of the companies are Boris Mange and Ursula Mange.
3. The appellants' bookkeeper Donna Alm committed fraud against the companies by way of issuing a long series of fraudulent cheques. These cheques were honoured by her bank, the respondent Canadian Imperial Bank of Commerce (“CIBC”) over the course of five years. The appellants brought an action in negligence, and in the alternative, conversion, against their bank, the Royal Bank of Canada, and against the respondent.
4. Donna Alm had been working for the appellants since 1967. Her responsibilities included preparing the payroll, handling accounts receivable and payable, preparing cheques and reconciling bank statements. She was never an officer, director or shareholder of the companies. She was, however, a duly authorized signing officer on the bank accounts maintained by the companies, along with Boris and Ursula Mange. Cheques drawn on these accounts required only one authorized signature. It was understood that Alm was to sign cheques only when the others were unavailable to do so, and only with respect to legitimate obligations of the companies.
5. Donna Alm's sole supervisor was Boris Mange. He would occasionally look at the cheque register and monthly bank statements. However, no routine, internal or independent audits were ever undertaken prior to discovery of the fraud.
6. Between 1982 and 1987, Donna Alm operated three bank accounts at a CIBC branch in North Vancouver, as follows:
(a)a chequing account in the name of Donna Alm's first husband, John R. Alm;
(b)a joint chequing account in the name of Donna and John R. Alm; after February 10, 1987, this account became a joint account for Donna Alm and her second husband Lou Hilford;
(c)a chequing account in the name of Donna Alm; this account also became joint with Lou Hilford after February 10, 1987.
7. Between December 8, 1982 and May 6, 1987, Alm used the appellants' pre-printed cheque forms to create some 155 cheques totalling $91,289.54, payable to a number of persons connected with the appellants, including Boris Mange, Ursula Mange, several employees, and one of the subcontractors, Van Sang Lam. The cheques payable to Lam were, with one exception, made to "J. Lam" or "J. R. Lam", the initials and the last name mimicking the name of Donna Alm's first husband. Alm signed 146 of the cheques on behalf of the appellants, and fraudulently obtained Boris Mange's signature on the other nine. Alm deposited all the cheques into one of her accounts at the CIBC.
8. The appellants had entered into a verification agreement with the Royal Bank in connection with their accounts, which excepted "any payments made on forged or unauthorized endorsements". The fraudulently negotiated cancelled cheques were sent to the appellants, and most of them were removed and destroyed by Alm. Her conduct was not discovered until May 11, 1987, through a new assistant bookkeeper. Alm was immediately dismissed.
9. In April 1988, written notice with respect to some $74,000 worth of cheques was given to the Royal Bank and to the CIBC. A complete listing of the fraudulent cheques was provided to the Royal Bank and the CIBC in May of 1989, following a police investigation.
10. The CIBC's policy with respect to a customer wishing to deposit a third party cheque to her account was to require that the cheque be endorsed by the payee. If there was no endorsement by the payee, the teller was to return the cheque to the customer. However, 107 of the cheques payable to "J. Lam" or "J. R. Lam" were accepted by the CIBC for deposit in one or the other of the three accounts without endorsement. The tellers apparently assumed that the payee was "J. Alm" or "J. R. Alm", Donna Alm’s first husband, and so accepted the cheques without endorsement, contrary to policy. Donna Alm was a longstanding customer of the CIBC branch in question, and was considered to be reliable. The tellers also assumed, given the large number of transactions involving the appellants' cheques signed by Donna Alm, that Donna Alm owned the appellant companies. Some of the Lam cheques, and all of the cheques payable to other third parties, bore the forged endorsement of the payee, the forgeries having been perpetrated by Donna Alm.
11. The appellants were successful at trial, and the Royal Bank was ordered to pay $5,390.12, and the CIBC was ordered to pay $91,289.54: (1993), 81 B.C.L.R. (2d) 197, [1993] 7 W.W.R. 368. CIBC appealed the decision before a five-member panel. A majority of the Court of Appeal allowed the appeal, reducing the judgment so as to reflect only the amount of the nine cheques bearing Boris Mange's signature: (1994), 99 B.C.L.R. (2d) 201, 120 D.L.R. (4th) 250, [1995] 2 W.W.R. 435, 52 B.C.A.C. 161, 86 W.A.C. 161, 19 B.L.R. (2d) 166. A minority of two would have also held the CIBC liable for the amount of the 103 cheques signed by Donna Alm that were not endorsed.
II. Relevant Statutory Provisions
12. Bills of Exchange Act, R.S.C., 1985, c. B-4
2.In this Act ,
. . .
"bearer" means the person in possession of a bill or note that is payable to bearer;
. . .
"delivery" means transfer of possession, actual or constructive, from one person to another;
"endorsement" means an endorsement completed by delivery;
"holder" means the payee or endorsee of a bill or note who is in possession of it, or the bearer thereof;
20. . . .
(2)A negotiable bill may be payable either to order or to bearer.
(3) A bill is payable to bearer that is expressed to be so payable, or on which the only or last endorsement is an endorsement in blank.
(4) Where a bill is not payable to bearer, the payee must be named or otherwise indicated therein with reasonable certainty.
(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer.
39. (1) As between immediate parties and as regards a remote party, other than a holder in due course, the delivery of a bill
(a) in order to be effectual must be made either by or under the authority of the party drawing, accepting or endorsing, as the case may be. . . .
(2) Where the bill is in the hands of a holder in due course, a valid delivery of the bill by all parties prior to him, so as to make them liable to him, is conclusively presumed.
48. (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.
49. (1) Where a bill bearing a forged or an unauthorized endorsement is paid in good faith and in the ordinary course of business by or on behalf of the drawee or acceptor, the person by whom or on whose behalf the payment is made has the right to recover the amount paid from the person to whom it was paid or from any endorser who has endorsed the bill subsequent to the forged or unauthorized endorsement if notice of the endorsement being a forged or an unauthorized endorsement is given to each such subsequent endorser within the time and in the manner mentioned in this section.
55. (1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely,
(a) that he became the holder of it before it was overdue and without notice that it had been previously dishonoured, if such was the fact; and
(b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.
59. (1) A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill.
(2) A bill payable to bearer is negotiated by delivery.
(3) A bill payable to order is negotiated by the endorsement of the holder.
73. The rights and powers of the holder of a bill are as follows:
(a) he may sue on the bill in his own name;
(b) where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill;
(c) where his title is defective, if he negotiates the bill to a holder in due course, that holder obtains a good and complete title to the bill; and
(d) where his title is defective, if he obtains payment of the bill, the person who pays him in due course gets a valid discharge for the bill.
165. . . .
(3) Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.
III. Judgments Appealed From
A. British Columbia Supreme Court (1993), 81 B.C.L.R. (2d) 197
13. Macdonald J. first examined ss. 48(1) , 48(3) and 49 of the Bills of Exchange Act . He noted that all the cheques involved in this case had been properly issued, as they had all been signed either by Alm or by Mange, both of whom were authorized signing officers.
14. After considering the claim against the Royal Bank (not in issue in the instant appeal), Macdonald J. turned to the claims against the CIBC. The appellants claimed in negligence, conversion, and under the provisions of the Act itself. The negligence claim was dismissed, Macdonald J. finding that the CIBC owed no duty of care to the appellants. He also stated that the negligent failure of the appellants to detect Alm's fraudulent conduct far outweighed any negligent conduct on the respondent's part.
15. Macdonald J. found the respondent to be prima facie liable for conversion. Accordingly, he considered whether any of the following defences raised by the respondent could defeat the conversion claim: (a) the "worthless paper" defence; (b) the s. 165(3) defence; (c) the "fictitious payee" defence; and (d) the "inadequate notice" defence.
16. With respect to the worthless paper defence, the trial judge noted that where the signature of the maker of the cheque is forged, the cheques are "worthless", and incapable of conversion. However, in this case, Donna Alm and Boris Mange were authorized signing officers. Accordingly, the cheques in question were not worthless paper.
17. With respect to the second defence, s. 165(3) , Macdonald J. concluded as follows (at p. 207):
Where the endorsement is forged, or where the collecting bank neglects to require an endorsement by the payee and its own customer, that result would completely negative the effect of s. 48 of the Act . I accept the response of the [appellants] that "delivery" in s. 165(3) in these circumstances requires the authority of the drawer under s. 39(1) (a) of the Act , and that Donna Alm had no such authority. I reject the submission of C.I.B.C. that her authority to sign cheques on behalf of the [appellants] carried with it the authority to deliver the same. In my view, any such authority to deliver is limited to cheques properly drawn payable to creditors of the [appellants].
With regard to those cheques with forged endorsements, there can be no argument that Donna Alm had any authority from the named payees.
I reject the defence to conversion based on s. 165(3) .
18. As a third defence, the CIBC submitted that the cheques in question had been made out to "fictitious payees", within the meaning of s. 20(5) of the Act . Accordingly, the respondent would be able to treat the cheques as payable to bearer, rather than payable to order, and negotiation of the cheques would not require endorsement, but only delivery. Macdonald J. found a complete answer to this issue in Number 10 Management Ltd. v. Royal Bank of Canada (1976), 69 D.L.R. (3d) 99, at p. 102, wherein the Manitoba Court of Appeal found that a collecting bank guarantees the endorsement of all properly issued bills of exchange, and that where the bank pays out money on a forged endorsement, the bank will be liable. Macdonald J. found this approach to be consistent with the scheme of the Act . He stated that as the drawer of a cheque owes no duty to its own bank to verify monthly statements, in the absence of a verification agreement, then it certainly cannot owe any such duty to a collecting bank. He also noted that under s. 48(1) of the Act , a forged endorsement is wholly inoperative and gives no right either to retain the bill or enforce payment thereof. Macdonald J. agreed with the appellants that the fictitious payee defence is largely irrelevant to an action against a collecting bank for conversion, because in his view (at p. 208):
... a bearer cheque can be converted by a person not authorized to deliver it. Where the C.I.B.C. can be regarded as an agent for its dishonest customer to collect, as would appear to be the case under its practice set out in the Agreed Statement of Facts, it is responsible to the drawer for her conversion.
He concluded that, even if the cheques in question were payable to "fictitious persons" within the meaning of s. 20(5) , and the CIBC was entitled to treat them as bearer cheques, the cheques were not "delivered" or "negotiated" and the CIBC did not acquire title to them. Accordingly, the CIBC had no right to obtain payment for the cheques from the appellants' bank accounts.
19. With respect to the last defence raised, Macdonald J. was of the view that notice had been provided within a reasonable time in this case.
20. The trial judge ultimately concluded that it was on the third ground advanced by the appellants that the claim should succeed, that is, under s. 49(1) of the Act . Under this section, where a cheque bearing a forged endorsement is paid, there is a right of recovery against any subsequent endorser. In his view, this section makes the CIBC "the guarantor of the validity of the payee’s endorsement on the cheques in issue here" (p. 208), as stated in Number 10 Management. As for the cheques that were not endorsed, the trial judge stated that they had not been delivered within the meaning of s. 59(2) . He also noted that the situation between the plaintiff and a collecting bank should be different from the situation between the plaintiff and its own bank (at pp. 208-9):
The drawee bank is entitled to rely upon a person whom the drawer has authorized to conduct banking business on its behalf. There is no such connection between the drawer and the collecting bank, which is dependent upon its own customer for protection.
The system requires the collecting bank to verify the endorsement ahead of its own, and it must rely on its own customer in that regard by ensuring that sufficient funds remain in the customer's account until the cheque has cleared or count on that customer to cover any cheque not honoured by the drawee bank.
For these reasons, the CIBC's negligence in failing to obtain an endorsement on the "Lam" cheques was a bar to the CIBC's reliance upon any estoppel arising from the negligence of the appellants.
21. The trial judge ordered judgment against the Royal Bank for $5,390.12, and judgment against the CIBC for the whole of the $91,289.54 claimed.
B. British Columbia Court of Appeal (1994), 99 B.C.L.R. (2d) 201
1. Southin J.A. (for the majority)
22. Southin J.A. emphasized the following four facts, which in her view were critical to the resolution of the appeal: (1) the cheques involved were the drawers' cheques, rather than forgeries thereof; (2) Alm, the signatory of the 146 cheques, intended both to validate the cheques for the bank upon which they were drawn and to receive the proceeds; (3) Mange, the signatory of the nine cheques, intended to validate them for the Royal Bank, but did not intend that anyone other than the named payee should receive the proceeds; and (4), of the 155 cheques, 107 were collected by the CIBC, although they were payable to a third party and had not been endorsed.
23. Southin J.A. concluded that the crux of the action in conversion was that the recipient of the proceeds, Donna Alm, was not the person intended to receive the funds. In this regard, it was important to determine whether it was the company's or the signatory's intention that was of relevance. Southin J.A. concluded that Alm, an authorized signing agent, had the power to bind her principal, and accordingly, it was Alm's intention that should prevail. Consequently, Southin J.A. was of the view that the action in relation to the 146 cheques that Alm had signed could not succeed, as there had been no misdirection of these cheques; Alm intended all along that they be directed to herself. The action in conversion could only succeed with respect to the nine cheques that Mange had signed, as they had truly been diverted from their intended recipient.
24. With respect to the application of s. 20(5) to the nine cheques signed by Mange, Southin J.A. noted that whether someone is "fictitious or non-existing" within the meaning of s. 20(5) of the Act must "depend on the intention of the drawer of the cheque, not the intention of the person who fills in the cheque" (p. 217). The intention of the drawer in this case, that is, the appellants, was that the payees receive payment. Accordingly, the payees were not fictitious persons, and the cheques could not be treated as payable to bearer.
25. Southin J.A. rejected the s. 165(3) defence raised by the CIBC. She stated that she was not "persuaded that Parliament intended, by s. 165(3) , to give a bank an independent title to a cheque payable to A and intended by the drawer to be paid to A which was deposited to the account of B without any endorsement by A or with an endorsement by A which is forged" (p. 218). Accordingly, Southin J.A. held that the appellants were entitled to recover from the CIBC on the nine cheques signed by Mange. The award given at trial was reduced to the amount of the nine cheques.
2. Hutcheon J.A. (dissenting in part)
26. Hutcheon J.A. agreed with Southin J.A.'s disposition, "save as to 103 of the 107 cheques on which there was no signature purporting to be an endorsement of the payee" (p. 220). In his view, the cheques accepted by the CIBC without any endorsement were patently irregular on their face. He stated that in order for the provisions of s. 20(5) to be of application, the person claiming to enforce payment of the cheque must be its lawful holder. A holder, pursuant to s. 2 of the Act , is "the payee or endorsee of a bill or note . . . or the bearer thereof", and a bearer is a "person in possession of a bill or note that is payable to bearer". He concluded as follows (at p. 222):
The Bank was neither the payee nor the endorsee of the cheques in question. Nor was it the person in possession of a cheque that was payable to bearer. All that s. 20(5) provides is that the cheque "may be treated as payable to bearer". On a strict construction of s. 20(5) that is different from a provision that the cheque is payable to bearer. No policy reason exists for extending s. 20(5) beyond its express letter to protect a collecting bank that received and paid the unendorsed cheques contrary to its own internal rules.
For these reasons, s. 20(5) cannot be invoked by the Bank to set up the defence to the claim of conversion that the Bank was justified in ignoring the existence of a named payee on the face of the cheques. With respect I do not think that it is any answer to say that if the Bank had not been internally careless Alm would simply have endorsed the cheques. I do not know what she would have done if she had been challenged.
I would therefore allow the appeal by varying the amount of the judgment to the amount of the nine cheques dealt with by Madam Justice Southin and of the 103 cheques dealt with in these reasons.
IV. Issues
A. On Appeal
27.1.Were the cheques in question made payable to fictitious or non-existing persons?
2.Were the cheques in question "delivered" to the CIBC?
3.Was the CIBC, as a "collecting" bank, prima facie liable to the appellants in conversion so that the cheques in question had to be properly negotiated to the CIBC in order for the CIBC to obtain title to those cheques and thereby escape liability?
4.Is the defence of contributory negligence available to the respondent?
B. On Cross-Appeal
28.1.What is the proper interpretation of s. 165(3) , and in particular:
(a)Must the cheque be deposited to the credit of its payee for the subsection to apply?
(b)Must the cheque be endorsed before the bank can credit the person with the amount of the cheque?
(c)Must the cheque be delivered with the authority of the drawer or endorser, or does simply handing it to the bank teller for deposit suffice?
V. Analysis
29. I have found it helpful to consider this appeal in terms of three broad issues, as follows: the doctrine of conversion with respect to cheques; s. 20(5) as a defence to an action in conversion; and s. 165(3) as a defence to an action in conversion.
A. Conversion in relation to cheques
30. It is a commonly accepted proposition that a bill of exchange is a chattel that can be negotiated from party to party. An individual obtains title to a bill through negotiation. Once an individual has obtained title, that individual has the right to present the bill to the drawee for payment, as well as a right of recovery against the drawer if the bill is dishonoured by the drawee.
31. The tort of conversion involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner's right of possession. The tort is one of strict liability, and accordingly, it is no defence that the wrongful act was committed in all innocence. Diplock L.J. asserted this principle in Marfani & Co. v. Midland Bank, Ltd., [1968] 2 All E.R. 573, at pp. 577-78:
. . . the moral concept of fault in the sense of either knowledge by the doer of an act that is likely to cause injury, loss or damage to another, or lack of reasonable care to avoid causing injury, loss or damage to another, plays no part.
...
If the customer is not entitled to the cheque which he delivers to his banker for collection, the banker, however, innocent and careful he might have been, would at common law be liable to the true owner of the cheque for the amount of which he receives payment, either as damages for conversion or under the cognate cause of action, based historically on assumpsit, for money had and received.
32. The fact that liability for the tort of conversion is strict suggests that the respondent's submission that the appellants were contributorily negligent must fail. The matter was raised before the Court of Appeal, and was dismissed without reasons. While this argument would be available in an action for negligence, the notion of strict liability involved in an action for conversion is prima facie antithetical to the concept of contributory negligence.
33. It is true that the comments of Professor Ogilvie in Canadian Banking Law (1991), at pp. 593-94, provide some support for the respondent's position:
Contributory negligence would require courts to apportion liability in accordance with negligence as between the true owner and the bank in cases of conversion. The availability of contributory negligence as a defence in an action for conversion was originally doubtful because the defence was at first only thought to be available i