Canadian Pacific Hotels Ltd. v. Bank of Montreal

Canadian Pacific Hotels Ltd. v. Bank of Montreal
Collection
Supreme Court Judgments
Date
1987-06-04
Report
[1987] 1 SCR 711
Case number
17330
Judges
Estey, Willard Zebedee; McIntyre, William Rogers; Chouinard, Julien; Lamer, Antonio; Wilson, Bertha; Le Dain, Gerald Eric; La Forest, Gérard V.
On appeal from
Ontario
Subjects
Bills of exchange
Financial institutions
Notes
SCC Case Information: 17330
Decision Content
Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711
Canadian Pacific Hotels Limited Appellant
v.
Bank of Montreal Respondent
and
Morris Sands also known as Morris Sigulim also known as Morris Van Sigoulim, Dundas Discounts Limited and Sig‑Mor Sales Limited Defendants
indexed as: canadian pacific hotels ltd. v. bank of montreal
File No.: 17330.
1985: April 24; 1987: June 4.
Present: Estey, McIntyre, Chouinard*, Lamer, Wilson, Le Dain and La Forest JJ.
*Chouinard J. took no part in the judgment.
on appeal from the court of appeal for ontario
Banks and banking operations ‑‑ Forged cheques ‑‑ Customer's employee forging signatures of signing officers and concealing forgeries ‑‑ Whether customer precluded from setting up forgeries against the bank ‑‑ Whether or not duty, in the absence of a verification agreement, to examine bank statements with reasonable care and to report discrepancies within a reasonable time ‑‑ Whether or not duty to maintain adequate internal accounting controls for the prevention and minimization of loss through forgery ‑‑ Bills of Exchange Act, R.S.C. 1970, c. B‑5, s. 49(1).
Bills of Exchange ‑‑ Forged cheques ‑‑ Customer's employee forging signatures of signing officers and concealing forgeries ‑‑ Whether or not customer precluded from setting up forgeries against bank ‑‑ Whether or not duty, in the absence of a verification agreement, to examine bank statements with reasonable care and to report discrepancies within a reasonable time ‑‑ Whether or not duty to maintain adequate internal accounting controls for the prevention and minimization of loss through forgery.
A number of forged cheques were drawn on the chequing account, at respondent bank, of one of appellant's operating units and were made payable to defendant companies which were controlled by defendant Sands. The cheques in question required the signature of both the unit's manager and its accountant. Sands, as assistant accountant for the unit forged both signatures and then, when he became the unit's accountant, that of the manager. The procedure manual required the accountant of the unit to prepare monthly bank reconciliations with a list of outstanding cheques and to forward them to the assistant accountant of the head office of the appellant. The responsibility for the bank reconciliations based on the daily bank statements and disbursement records was delegated to Sands, as assistant accountant, by the unit's accountant and was later exercised by Sands as accountant. The unit's accountant received a summary statement of the monthly bank reconciliation from Sands, generally without a list of the outstanding cheques, but otherwise did not check his work in the preparation of the bank reconciliation, or examine the daily bank statements or the cancelled cheques.
Appellant's banking operations were part of the over‑all banking arrangements made with the bank by Canadian Pacific Limited ("CP") for itself and its subsidiary and associated companies. CP was not required by the bank to sign a verification agreement obliging it and its subsidiary and associated companies to verify bank statements and report discrepancies within a specified period of time. Neither the general agreement between CP and the bank respecting the bank's remuneration nor the "Operation of Account Agreement" contained any reference to the verification of bank statements. The daily bank statement sent to the operating unit of the appellant contained the following statement: "Please check this statement promptly. Any errors, irregularities, or omission found therein should be reported within 30 days of delivery or mailing, otherwise it will be considered correct."
The trial judge, who was upheld by a majority of the Court of Appeal, found two duties on the part of the appellant: the duty, in the absence of a verification agreement, to examine bank statements with reasonable care and to report any discrepancies within a reasonable time, and the duty to maintain an acceptable system of internal controls for the prevention and minimization of loss through forgery. He found that the appellant was in breach of both duties, that its negligence was the cause of the loss, and that it was precluded by such negligence from setting up the forgeries against the bank. He accordingly dismissed the appellant's action for recovery of the amount by which its account had been debited for the payment of the forged cheques.
The issue was whether the appellant was precluded, within the meaning of s. 49(1) of the Bills of Exchange Act , from setting up the forgeries against the respondent. That question turned on whether, apart from the question of policy, there was a sound basis in law for either of the duties of care affirmed by the trial judge.
Held: The appeal should be allowed.
Per Estey, McIntyre, Lamer, Wilson and Le Dain JJ.: The appellant was not in breach of any duty owing to the respondent and was therefore not precluded from setting up the forgeries against the bank. A customer of a bank does not, in the absence of a verification agreement, owe a duty to the bank to examine bank statements with reasonable care and to report any discrepancies within a reasonable time, nor does a customer, "sophisticated" or otherwise, owe a duty to its bank to maintain an adequate system of internal accounting controls for the prevention and minimization of loss through forgery. There is no basis under any of the categories of implication for holding either duty to be an implied term of the contract between banker and customer. Any such implication would have to apply to all customers and not merely to customers of a certain size or kind, characterized as "sophisticated commercial customers". In view of the established law and practice with respect to a customer's duty of care in respect of the prevention and detection of forgery in the drawing of his cheques, neither duty can be implied on the basis of presumed intention, as resting on custom or usage or on the business efficacy or "officious bystander" tests. Nor is there any basis for implication of either duty as a legal incident of a particular class of contract. The test for such implication is also one of necessity and not mere reasonableness. It was not argued whether, if either of the duties contended for by the respondent did not exist in contract, they could arise in tort. Nor was any consideration given as to whether, as a matter of principle, a duty of care in tort could be held to arise in a contractual relationship from which the same duty had been excluded by the courts as an implied term of the contract. Assuming it to be arguable that a duty to examine bank statements with reasonable care and to report any discrepancies within a reasonable time could arise in tort, the principle of concurrent or alternate liability in contract and in tort affirmed in Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147, cannot extend to the recognition of a duty of care in tort when the same duty of care has been rejected or excluded by the courts as an implied term of a particular class of contract.
Per La Forest J.: Notwithstanding general agreement with the judgment of Le Dain J., the issue of concurrent liability in contract and tort should not be approached by focussing discretely on the banker‑customer contract but in the context of the general system or code governing bills of exchange which developed without regard to the distinction between tort and contract. This system requires clear rules of general application; exceptions, based on estoppel, are narrow. To introduce a wider duty today under the rubric of the tort of negligence would effect the same uncertainties as those perceived by earlier authorities.
Parliament, by the Bills of Exchange Act and in particular s. 49(1) , generally sought to codify the pre‑existing law. The word "precluded" in that section cannot be read as authorizing at this late date a wide divergence from the rules for loss allocation that it sought to codify. This does not mean that the law is completely frozen, but it does mean that it cannot be expanded in such a way as to give rise under a new label to a wider duty that is inconsistent with the basic policy choice it sought to codify.
Cases Cited
By Le Dain J.
Considered: Arrow Transfer Co. v. Royal Bank of Canada, [1972] S.C.R. 845; Leather Manufacturers' Bank v. Morgan, 117 U.S. 96 (1886); London Joint Stock Bank v. Macmillan, [1918] A.C. 777; Greenwood v. Martins Bank, Ltd., [1933] A.C. 51, affirming [1932] 1 K.B. 371; Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., [1986] 1 A.C. 80, reversing [1984] 1 Lloyd's Rep. 555; Columbia Graphophone Co. v. Union Bank of Canada (1916), 38 O.L.R. 326; Ewing v. Dominion Bank, [1904] A.C. 806, refusing leave to appeal from (1904), 35 S.C.R. 133, affirming (1904), 7 O.L.R. 90; Freeman v. Cooke (1848), 2 Ex. 654, 154 E.R. 652; Young v. Grote (1827), 4 Bing. 253, 130 E.R. 764; Arnold v. Cheque Bank (1876), 1 C.P.D. 578; Agricultural Savings and Loan Association v. Federal Bank (1881), 6 O.A.R. 192; Bank of England v. Vagliano, [1891] A.C. 107, reversing (1889), 23 Q.B.D. 243; Kepitigalla Rubber Estates, Ltd. v. National Bank of India, [1909] 2 K.B. 1010; M`Kenzie v. British Linen Co. (1881), 6 App. Cas. 82; Ogilvie v. West Australian Mortgage, and Agency Corp., [1896] A.C. 257; Fung Kai Sun v. Chan Fui Hing, [1951] A.C. 489; Lister v. Romford Ice and Cold Storage Co., [1957] A.C. 555; distinguished: Central Trust Co. v. Rafuse, [1986] 2 S.C.R. 147; referred to: Bank of Montreal v. The King (1907), 38 S.C.R. 258; Bank of Montreal v. Attorney General (Que.), [1979] 1 S.C.R. 565; Devaynes v. Noble (generally referred to as Clayton's Case) (1816), 1 Mer. 529, 35 E.R. 767; Glassell Development Co. v. Citizens' National Bank of Los Angeles, 191 Cal. 375 (1923); Basch v. Bank of America, 22 C.2d 316 (1943); Pacific Coast Cheese, Inc. v. Security First National Bank of Los Angeles, 286 P.2d 353 (1955); Bank of Ireland v. Evans' Trustees (1855), 5 H.L.C. 389, 10 E.R. 950; Swan v. North British Australasian Co. (1863), 2 H. & C. 175, 159 E.R. 73; Rutherford v. Royal Bank of Canada, [1932] S.C.R. 131; Mackenzie v. Imperial Bank of Canada, [1938] O.W.N. 166; B. and G. Construction Co. v. Bank of Montreal, [1954] 2 D.L.R. 753; Banque Provinciale du Canada v. Syndicat des Camionneurs Artisans du Québec Métropolitain, [1970] C.A. 425, (1969), 11 D.L.R. (3d) 610; Bad Boy Appliances and Furniture Ltd. v. Toronto‑Dominion Bank (1972), 25 D.L.R. (3d) 257; Liverpool City Council v. Irwin, [1977] A.C. 239, varying [1976] 1 Q.B. 319; The "Moorcock" (1889), 14 P.D. 64; Reigate v. Union Manufacturing Co. (Ramsbottom), [1918] 1 K.B. 592; Shirlaw v. Southern Foundries (1926), Ltd., [1939] 2 K.B. 206; Greaves & Co. (Contractors) Ltd. v. Baynham Meikle and Partners, [1975] 3 All E.R. 99; Miller v. Hancock, [1893] 2 Q.B. 177; Shell UK Ltd. v. Lostock Garage Ltd., [1977] 1 All E.R. 481; Mears v. Safecar Security Ltd., [1982] 2 All E.R. 865; Harvela Investments Ltd. v. Royal Trust Co. of Canada (CI) Ltd., [1985] 1 All E.R. 261; Selangor United Rubber Estates Ltd. v. Cradock (No. 3), [1968] 1 W.L.R. 1555; Karak Rubber Co. v. Burden (No. 2), [1972] 1 W.L.R. 602; Anns v. Merton London Borough Council, [1978] A.C. 728; Esso Petroleum Co. v. Marden, [1976] Q.B. 801; Midland Bank Trust Co. v. Hett, Stubbs and Kemp, [1979] Ch. 384; Hutton v. Warren (1836), 1 M. & W. 446, 150 E.R. 517; The "Freiya" v. The ``R.S.'', [1922] 1 W.W.R. 409; Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110; Tournier v. National Provincial and Union Bank of England, [1924] 1 K.B. 461.
By La Forest J.
Referred to: Bank of Ireland v. Evans' Trustees (1855), 5 H.L.C. 389, 10 E.R. 950; Kepitigalla Rubber Estates, Ltd. v. National Bank of India, [1909] 2 K.B. 1010.
Statutes and Regulations Cited
Bills of Exchange Act, R.S.C. 1970, c. B‑5, s. 49(1).
Uniform Commercial Code, s. 4‑406.
Authors Cited
Cheshire, Geoffrey Chevalier, and Cecil H. Stuart Fifoot. Law of Contract, 10th ed. By M. P. Furmston. London: Butterworths, 1981.
Treitel, G. H. The Law of Contract, 5th ed. London: Stevens & Sons, 1979.
APPEAL from a judgment of the Ontario Court of Appeal (1982), 139 D.L.R. (3d) 575, dismissing an appeal from a judgment of Montgomery J. (1981), 32 O.R. (2d) 560, 122 D.L.R. (3d) 519, dismissing appellant's action. Appeal allowed.
John P. Bassel, Q.C., and Robert M. Zarnett, for the appellant.
John W. Adams, Q.C., and Ian V. B. Nordheimer, for the respondent.
The judgment of Estey, McIntyre, Lamer, Wilson and Le Dain JJ. was delivered by
1. Le Dain J.‑‑The general question raised by this appeal is the extent of the duty of care owed by a customer to a bank in respect of the prevention and detection of forgery in the drawing of the customer's cheques. The particular issue is whether, in the absence of an express agreement (generally referred to as a "verification agreement"), the customer owes a duty to examine bank statements and vouchers with reasonable care and to report any discrepancies within a reasonable time. There is also the question whether a "sophisticated commercial customer" owes a duty to its bank to maintain an acceptable system of internal controls, reflecting proper accounting practices and procedures, for the prevention and minimization of loss through forgery.
2. The appeal is by leave of this Court from the judgment of the Ontario Court of Appeal on June 25, 1982 (1982), 139 D.L.R. (3d) 575, dismissing an appeal from the judgment of Montgomery J. in the Supreme Court of Ontario on May 11, 1981 (1981), 122 D.L.R. (3d) 519, which dismissed the appellant's action against the respondent bank for $219,644.92, being the total amount debited to the appellant's account for the payment of twenty‑three cheques bearing the forged signatures of signing officers, on the ground that the appellant was precluded by negligence from setting up the forgeries against the bank.
I
3. The cheques in issue were drawn during the period April 1976 to July 1977 inclusive on the chequing account, at the respondent Bank of Montreal ("the Bank"), of the operating unit or division of the appellant Canadian Pacific Hotels Limited ("CP Hotels"), at the Toronto International Airport, known as the Chateau Flight Kitchen (sometimes referred to as the "Malton Flight Kitchen" and hereinafter referred to as the "Flight Kitchen"). The banking operations of CP Hotels, including those of the Flight Kitchen, were part of the over‑all banking arrangements made with the Bank by Canadian Pacific Limited ("CP") for itself and its subsidiary and associated companies. CP operated a centralized banking arrangement known as Treasury under which the Flight Kitchen maintained separate deposit and disbursement accounts with the Bank and a Treasury account with CP. Deposits were transferred on a daily basis to the Treasury account, and an amount was transferred daily from the Treasury account to the disbursement account to restore the balance in that account to zero. Disbursements by the Flight Kitchen to other participants under the Treasury banking arrangement were made by intercompany payment orders (ICPO's), which were non‑negotiable cheques drawn on the Treasury account. The Bank submitted a daily bank statement with vouchers to the Flight Kitchen. The CP Hotels procedure manual required the accountant of the Flight Kitchen to prepare monthly bank reconciliations with a list of outstanding cheques and to forward them to the assistant accountant of the head office of CP Hotels.
4. During the relevant period the staff of the Flight Kitchen concerned with banking and accounting matters consisted of the manager, Donald Saunders; the accountant, Robert Hird, who left in January 1977; the assistant accountant, Morris Sands (also known and referred to by the trial judge as "Morris Sigulim"), who assumed the position of accountant some two months after the departure of Hird; the disbursement clerk, W. Uddin; and the purchasing agent, the payroll clerk and the general clerk, whose functions and responsibilities, unlike those of the others, were not the subject of comment by the trial judge. During the relevant period the cheques of the Flight Kitchen required the signature of two signing officers: that of the manager, Saunders, and that of the accountant, Hird, and later that of Sands. As the accountant, Hird was responsible for the bank reconciliations based on the daily bank statements and the disbursement records, including the cancelled cheques, but he delegated that function to the assistant accountant, Sands. Uddin was responsible for keeping the disbursement records, including the cancelled cheques. Hird received a summary statement of the monthly bank reconciliation from Sands, generally without a list of the outstanding cheques. He did not otherwise check the work of Sands in the preparation of the bank reconciliation. He did not examine the daily bank statements or the cancelled cheques, nor did he check the work of Uddin.
5. During the relevant period the defendant Sands forged the signature of Saunders on all twenty‑three, and the signature of Hird on nineteen, of the cheques for which the claim is made. He made the cheques payable to the defendant companies, Dundas Discounts Limited and Sig‑Mor Sales Limited, which were controlled by him. The for­geries were not discovered until August, 1977. CP Hotels gave the Bank notice of them on August 25, 1977.
6. The daily bank statement sent to the Flight Kitchen contained the following statement: "Please check this statement promptly. Any errors, irregularities, or omissions found therein should be reported within 30 days of delivery or mailing, otherwise it will be considered correct." CP was not required by the Bank to sign a verification agreement obliging it and its subsidiary and associated companies to verify bank statements and report discrepancies within a specified period of time. Neither the general agreement between CP and the Bank respecting the Bank's remuneration nor the "Operation of Account Agreement" contained any reference to the verification of bank statements.
7. The action of CP Hotels against the Bank for recovery of the amount of $219,644.92 is framed as one for conversion and alternatively for money had and received and alleges breach of contract and negligence by the Bank in honouring the forged cheques. In its defence the Bank alleges that CP Hotels is "estopped or otherwise denied" from recovering the amounts debited in respect of the forged cheques by the breach of a duty, arising out of the banker and customer relationship, to check its bank statements and vouchers on at least a monthly basis, with a bank reconciliation for such purpose, and to notify the Bank immediately of any errors. The Bank also sets up in relation to this alleged duty the defence of a stated or settled account. The Bank further alleges the breach by CP Hotels of a duty to take reasonable precautions to prevent fraud by its employees in relation to dealings with the Bank by the maintenance of adequate supervision and internal accounting controls and also invokes the responsibility of a principal for the fraud of an agent acting within the scope of his actual or apparent authority.
8. Both CP Hotels and the Bank rely on s. 49(1) of the Bills of Exchange Act, R.S.C. 1970, c. B‑5, which provides:
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.
CP Hotels relies on s. 49(1) for the rule that a forged signature is wholly inoperative and thus the Bank had no authority to pay the cheques and debit CP Hotels for the amount of them. Both the Bank and CP Hotels rely on s. 49(1) for the extent to which the general rule respecting the effect of a forged signature has been qualified by the words "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." Thus the issue in the case is whether CP Hotels is precluded, within the meaning of s. 49(1), from setting up the forgeries against the Bank.
9. Despite the absence of a verification agreement, Montgomery J. in the Supreme Court of Ontario held that CP Hotels owed a duty to the Bank to examine its bank statements with reasonable care and to report any discrepancies within a reasonable time. He also held that a "sophisticated commercial customer", such as CP Hotels, owed a duty to its bank to maintain an acceptable system of internal controls for the prevention and minimization of loss through forgery. Such controls included a division or segregation of duties and supervision and verification of the work of those responsible for the bank reconciliation and the records on which it must be based. The trial judge found that CP Hotels was in breach of both duties and that its negligence was the cause of the loss resulting from the forgeries. In particular, he found that the accountant, Robert Hird, had been negligent in delegating the bank reconciliation to Sands and not supervising or checking his work and that of the disbursement clerk, Uddin. He also found a lack of supervision by the manager of the Flight Kitchen and by the head office of CP Hotels, particularly after Sands had assumed the duties of accountant. The trial judge found that it was the lack of supervision and other internal controls that permitted Sands to conceal the for­geries for as long as he did by manipulation of the bank reconciliation and the accounting records on which it was based, and that but for the negligence of CP Hotels the irregularities would have been discovered as early as April 1976. The trial judge also found that the Bank, which employed verification clerks to verify the signatures of customers, had not been negligent. He held that CP Hotels was precluded by its negligence from setting up the forgeries against the Bank, and he accordingly dismissed its action.
10. A majority of the Ontario Court of Appeal (Jessup and Houlden JJ.A.) dismissed the appeal from this judgment for the reasons of Montgomery J. Lacourcière J.A., dissenting, was of the view that it was not open to the trial judge, on the existing authorities and in the absence of a verification agreement, to base a dismissal of the action of CP Hotels on the breach of a duty to examine bank statements with reasonable care and to report discrepancies within a reasonable time. While intimating that the imposition of such a duty might be desirable, he held that it could only be properly imposed by an amendment to s. 49 of the Bills of Exchange Act or by a judgment of this Court departing from "its traditional interpretation of s. 49 ". I quote his brief dissenting reasons in full because they serve to indicate the general focus of the issue in the appeal:
In my opinion the learned trial judge was not free to dismiss the appellant's action on the basis of its failure to examine the bank statements with reasonable care and to report discrepancies within a reasonable time. In the absence of a verification agreement, no such duty has ever been fastened upon bank customers in Canada. If this is to be done, as I think perhaps it should, it is for Parliament to modify s. 49 of the Bills of Exchange Act, R.S.C. 1970, c. B‑5, along the lines of the United States Uniform Commercial Code, the relevant provisions of which are quoted in Arrow Transfer Co. Ltd. v. Royal Bank of Canada et al., [1972] S.C.R. 845, 27 D.L.R. (3d) 81, [1972] 4 W.W.R. 70. Alternatively, it is open to the Supreme Court of Canada to depart from its traditional interpretation of s. 49. Only in that way will the desirable uniformity be achieved. Unless that is done, a bank which debits a customer's account in respect of forged cheques as the respondent bank did in the present case is liable to the customer in the absence of a suitable verification agreement or other circumstances creating a true estoppel: see Arrow Transfer, supra, at p. 851 S.C.R., p. 84 D.L.R. In my view, the doctrine of stare decisis was departed from by the learned trial judge, albeit in a progressive and well‑ reasoned judgment.
II
11. As suggested by the reasons of Montgomery J. and the dissenting reasons of Lacourcière J.A., the issue in the appeal turns initially on the view which one takes of the judgment of the majority of this Court, delivered by Martland J., and the separate reasons, concurring in the result, of Laskin J. (as he then was) in Arrow Transfer Co. v. Royal Bank of Canada, [1972] S.C.R. 845. In that case the majority of the Court held that the customer was precluded by a verification agreement from recovering the amount debited to its account by the bank pursuant to the payment of cheques on which the customer's signature had been forged. In the course of his judgment for the majority, Martland J. said at p. 851 (the statement to which Larcourcière J.A. was presumably referring): "In the absence of the verification agreement, a bank which debited a customer's account in respect of a forged cheque would be liable to him." Laskin J. was of the view that the verification agreement did not apply to the forged drawing of a cheque, but he found that the customer was precluded by negligence from recovering against the bank. After concluding that the verification agreement did not provide the bank with a defence, Laskin J. said at p. 870: "Is then the Royal Bank's only defence to the claim of the appellant that the latter is (to refer to what is stated in s. 49(1) of the Bills of Exchange Act ) precluded from setting up any or all of the forgeries?" After referring to the American law, as reflected in the judgment of the United States Supreme Court in Leather Manufacturers' Bank v. Morgan, 117 U.S. 96 (1886), and in §say 4‑406 of the Uniform Commercial Code (to which Lacourcière J.A. referred), Laskin J. said at p. 873: "I do not think it is too late to fasten upon bank customers in this country a duty to examine bank statements with reasonable care and to report account discrepancies within a reasonable time." In the result, Laskin J. held that the customer was precluded by the breach of a wider duty of care, comparable to the wider duty found by Montgomery J., from recovering against the Bank. It was contended by counsel for CP Hotels, as was apparently assumed by Lacourcière J.A., on the basis of the statement quoted above from the judgment of Martland J., that the majority judgment of this Court in Arrow Transfer decided, in effect, that a customer could not, in the absence of a verification agreement, be precluded from recovering against a bank by the breach of a duty to examine bank statements with reasonable care and to report any discrepancies within a reasonable time. For the reasons indicated more fully in the later discussion of Arrow Transfer, I am of the respectful opinion that this was not the case, and that having based its conclusion on the verification agreement the majority did not purport to address the question raised by Laskin J., which is the issue in the present appeal.
12. While we are not, in my opinion, prevented by the opinion of the majority in Arrow Transfer from adopting the view expressed by Laskin J. in that case, as Montgomery J. did, that result would undoubtedly represent a departure in the law respecting the duties owed by a customer to a bank in respect of the prevention and detection of for­gery in the drawing of his cheques, in the absence of a verification agreement. It would involve the recognition of a duty of care extending beyond those that have been recognized by judicial authority in England, as reflected in London Joint Stock Bank v. Macmillan, [1918] A.C. 777 (H.L.), Greenwood v. Martins Bank, Ltd., [1933] A.C. 51 (H.L.), and most recently, Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd., [1986] 1 A.C. 80 (P.C.) These are the duty of a customer to use reasonable care to draw his cheques in such a manner as not to facilitate forgery or material alteration of them, and the duty, upon learning of forgery, to give the bank prompt notification of it. At least until the opinion of Laskin J. in Arrow Transfer, these duties were accepted in Canadian law as indicating the limits, in the absence of a verification agreement, of the customer's duties in respect of the prevention and detection of forgery in the drawing of his cheques. See Columbia Graphophone Co. v. Union Bank of Canada (1916), 38 O.L.R. 326 (H.C.) Montgomery J. acknowledged that he was breaking new ground. Referring to the decisions of this Court in Ewing v. Dominion Bank (1904), 35 S.C.R. 133, Bank of Mont­real v. The King (1907), 38 S.C.R. 258 and Arrow Transfer, and the decision of the Ontario High Court in Columbia Graphophone, supra, Montgomery J. said at p. 528:
There is no explicit statement that the customer will be estopped by reason of his own negligence in failing to adequately examine the bank statements or in failing to adequately supervise the fraudulent clerk.
It is to this last point that counsel for the defence addressed a most reasoned and persuasive argument. Can it reasonably be said that principles of law enunciated at the beginning of the century must remain unchanged in the context of the present‑day relationship between an extremely sophisticated commercial customer and his bank?
Counsel for the Bank also conceded in argument that the Court was being invited to extend the customer's duty of care. Referring to the two duties of a customer clearly established by the existing authority, which counsel described as a duty "not to draw a cheque in a manner which might facilitate alteration" and a duty "promptly to report the forgery of his signature on a cheque when he becomes aware of it", counsel for the Bank stated in their factum: "Given these duties, it is but a short and logical step to suggest that a customer who receives a periodic statement of his account (daily in the case of the Appellant) and, more importantly, the original vouchers, should be required to look at them and report discrepancies." Counsel also referred to the trial judge's "extension of the customer's duty of care." Counsel for the Bank did argue an estoppel by silence on the basis of what would amount to imputed knowledge of forgery but this also would appear to involve finding a duty to examine bank statements with reasonable care and to report discrepancies within a reasonable time.
13. The breach of such a contractual duty, if it existed, would in my opinion clearly fall within the meaning of "precluded" in s. 49(1) , assuming of course that it could be shown to have caused prejudice or detriment, because it could be properly characterized (as it was in Leather Manufacturers' Bank) as resulting in that species of estoppel by representation often referred to as estoppel by conduct or estoppel by negligence. I am therefore of the view that it is necessary to determine whether such a duty exists. I do not find it necessary or desirable for purposes of the present appeal to express a view as to the extent to which a party may be precluded by negligence under s. 49(1) from setting up a forgery. I am satisfied that whatever be the proper scope and meaning to be assigned to the word "precluded" in s. 49(1) it cannot be construed as freezing the kinds of duties, the breach of which may be properly characterized as resulting in an estoppel by representation.
14. The issue, as I see it, is whether, apart from the question of policy, on which opinions obviously differ, there is a sound basis in law for such a duty. Laskin J. did not address this issue in Arrow Transfer, nor did Montgomery J. explore it in any depth in the present case. It was, however, fully canvassed in relation to a wider duty of care in the judgments of the Hong Kong Court of Appeal and the Judicial Committee of the Privy Council in Tai Hing. The consideration of this issue requires a review of the existing authorities with respect to a customer's duty of care to a bank in respect of the prevention and detection of forgery in the drawing of his cheques.
15. Before undertaking this review something should perhaps be said about the apparent scope, relationship and basis of the two duties affirmed by Montgomery J.: the duty, in the absence of a verification agreement, to examine bank statements with reasonable care and to report any discrepancies within a reasonable time, and the duty to maintain an acceptable system of internal controls for the prevention and minimization of loss through forgery. It would appear that Montgomery J. regarded both of these duties as applicable to the "sophisticated" customer, and that he found the basis for them in "commercial custom" adopted as an implied term of the contract between banker and customer. He began his reasons for judgment with the following question at p. 520: "What is the duty a sophisticated customer owes to its banker?" After referring to what was said by Pratte J. in Bank of Montreal v. Attorney General (Que.), [1979] 1 S.C.R. 565 at pp. 569‑70, concerning the role of commercial custom in the banker and customer relationship, and quoting at length from the opinion of Laskin J. in Arrow Transfer, Montgomery J. said at p. 532:
In my view the majority judgment in Bank of Mont­real v. A.‑G. Que., supra, by referring to "commercial custom" permits me to imply the type of duty contemplated by Laskin J. in Arrow Transfer, supra, to the banking relationship between CP and the bank, quite apart from their express banking agreement. I cannot see that a large sophisticated bank customer who receives daily statements of account from its bank, whose daily bank transactions amount to many thousands of dollars, can be absolved of responsibility for checking the accuracy of those statements in respect of cheques bearing forged signatures. If the bank is to be held liable to its customer for honouring cheques bearing forged signatures surely it must be considered a part of commercial custom that the customer take steps to identify forgeries and prevent their recurrence as part of normal business practice. The Price Waterhouse report indicated unequivocally that had CP Hotels followed proper accounting practices and procedures, Sigulim would not have been able to succeed in his scheme. Such practices and procedures necessarily include proper bank reconciliations.
With reference to the requirement of an acceptable system of internal controls, he said at p. 533:
In a commercial context an efficient internal control system is designed to prevent frauds against the corporation without regard to specific provisions of the Bills of Exchange Act . In my opinion a bank dealing with a sophisticated commercial customer has a right to expect that the customer will have such internal controls in place. The customer owes a duty to the bank to operate an acceptable internal control system so that both the bank and its customer are jointly engaged in prevention and minimization of losses occurring through forgeries.
To impose such a duty on a sophisticated customer does not run counter to the spirit of the Bills of Exchange Act . . . .
16. In this Court counsel for the Bank contended chiefly for a duty of general application to examine bank statements with reasonable care and report discrepancies within a reasonable time, as indicated by his opening submission in oral argument that the Court should recognize a duty of the kind set out in §say 4‑406 of the Uniform Commercial Code, although I did not understand him to abandon reliance on a duty to maintain an adequate system of internal accounting controls for the prevention and minimization of loss through forgery.
III
17. I find it convenient to begin the consideration of judicial opinion with reference to the basis of the customer's duties to a bank in respect of the prevention and detection of forgery in the drawing of his cheques with the judgment of the Supreme Court of the United States in Leather Manufacturers' Bank, supra, because it contains an early analysis of the issues of law and policy and has been invoked over the years in the English and Canadian cases by those contending that the customer should have a wider duty of care than that which has been recognized in those cases. Leather Manufacturers' Bank was a case of material alteration by a confidential clerk in which the amounts of cheques were raised after the cheques had been signed by his employer. The customer's pass‑book had been returned to him at intervals with his cancelled cheques, but the necessary bank reconciliation was left to the clerk who, among other things, destroyed the cheques that had been altered, with the result that the fraud remained concealed for several months. It was a case of an employee's being left in complete control of the verification of the pass‑book and vouchers and the accounting records on which such verification would have to be based. The principle or rule to be derived from the reasons of the Supreme Court in this case is conveniently stated in the head‑note as follows: "A depositor in a bank, who sends his pass‑book to be written up and receives it back with entries of credits and debits and his paid checks as vouchers for the latter, is bound personally or by an authorized agent, and with due diligence, to examine the pass‑book and vouchers, and to report to the bank, without unreasonable delay, any errors which may be discovered in them; and if he fails to do so, and if the bank is thereby misled to its prejudice, he cannot afterwards dispute the correctness of the balance shown by the pass‑book." Interestingly, in view of the subsequent development of English law on this question, Harlan J., who delivered the opinion of the Supreme Court, relied in part on two English cases: Devaynes v. Noble (generally referred to as Clayton's Case) (1816), 1 Mer. 529, 35 E.R. 767, and Freeman v. Cooke (1848), 2 Ex. 654, 154 E.R. 652. He relied on these cases with reference to usage as the basis of the customer's duty and to estoppel as the result of a breach of that duty. With reference to Devaynes v. Noble, Harlan J. said at pp. 106‑07:
In Devaynes v. Noble, 1 Meriv. 530, 535, it appeared that the course of dealing between banker and customer, in London, was the subject of inquiry in the High Court of Chancery as early as 1815. The report of the master stated, among other things, that for the purpose of having the pass‑book "made up by the bankers from their own books of account, the customer returns it to them from time to time as he thinks fit; and, the proper entries being made by them up to the day on which it is left for that purpose, they deliver it again to the customer, who thereupon examines it, and if there appears any error or omission, brings or sends it back to be rectified; or, if not, his silence is regarded as an admission that the entries are correct." This report is quite as applicable to the existing usages of this country as it was to the usages of business in London at the time it was made. The depositor cannot, therefore,