Teva Canada Ltd. v. TD Canada Trust

Teva Canada Ltd. v. TD Canada Trust
Collection
Supreme Court Judgments
Date
2017-10-27
Neutral citation
2017 SCC 51
Report
[2017] 2 SCR 317
Case number
36918
Judges
McLachlin, Beverley; Abella, Rosalie Silberman; Moldaver, Michael J.; Karakatsanis, Andromache; Wagner, Richard; Gascon, Clément; Côté, Suzanne; Brown, Russell; Rowe, Malcolm
On appeal from
Ontario
Notes
SCC Case Information: 36918
Decision Content
SUPREME COURT OF CANADA
Citation: Teva Canada Ltd. v. TD Canada Trust, 2017 SCC 51, [2017] 2 S.C.R. 317
Appeal Heard: February 24, 2017
Judgment Rendered: October 27, 2017
Docket: 36918
Between:
Teva Canada Limited
Appellant
and
TD Canada Trust and Bank of Nova Scotia
Respondents
- and -
Canadian Generic Pharmaceutical Association
Intervener
Coram: McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté, Brown and Rowe JJ.
Reasons for Judgment:
(paras. 1 to 76)
Abella J. (Moldaver, Karakatsanis, Gascon and Brown JJ. concurring)
Joint Dissenting Reasons:
(paras. 77 to 156)
Côté and Rowe JJ. (McLachlin C.J. and Wagner J. concurring)
Teva Canada Ltd. v. TD Canada Trust, 2017 SCC 51, [2017] 2 S.C.R. 317
Teva Canada Limited Appellant
v.
TD Canada Trust and
Bank of Nova Scotia Respondents
and
Canadian Generic Pharmaceutical Association Intervener
Indexed as: Teva Canada Ltd. v. TD Canada Trust
2017 SCC 51
File No.: 36918.
2017: February 24; 2017: October 27.
Present: McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté, Brown and Rowe JJ.
on appeal from the court of appeal for ontario
Commercial law — Bills of exchange — Fraudulent cheques — Conversion — Defences — Banks — Approach to determine whether payee is “fictitious or non‑existing” within meaning of s. 20(5) of Bills of Exchange Act — Employee implementing fraudulent cheque scheme using similar or identical names of employer company’s real customers to whom company owed no debt — Employer’s accounts payable department issuing cheques with mechanically applied signatures — Employee opening bank accounts in names of registered businesses and depositing fraudulent cheques — Whether company or collecting banks should bear loss resulting from fraud — Whether collecting banks liable to company for conversion — Whether cheques payable to fictitious or non‑existing person — Bills of Exchange Act, R.S.C. 1985, c. B‑4, s. 20(5) .
T, a pharmaceutical company, was the victim of a fraudulent cheque scheme implemented by one of its employees, M. M’s scheme involved drafting false cheque requisition forms for business entities with similar or identical names to those of T’s real customers, to whom no debt was owed. Based on M’s fraudulent forms, T’s accounts payable department issued the cheques and mechanically applied the requisite signatures. M registered the business names as sole proprietorships and opened bank accounts at several banks. In total, he deposited 63 fraudulent cheques totaling $5,483,249.40 into these accounts and eventually removed the funds.
T filed an action claiming that the collecting banks involved in negotiating the fraudulent cheques are liable for conversion, a strict liability tort. The banks argued that the payees in this case were fictitious or non‑existing and that they were not, as a result, liable for conversion. Under s. 20(5) of the Bills of Exchange Act , it is a defence to the tort of conversion if cheques are made out to “fictitious or non‑existing” payees. The defence operates by rendering the impugned cheque “payable to bearer”, such that mere delivery — without endorsement — effects negotiation. The cheque would otherwise be “payable to order”, require an endorsement, and, without such endorsement, be wrongly converted by the bank.
The motions judge found that the payees were not fictitious or non‑existing within the meaning of s. 20(5); therefore, the banks could not rely on that defence and were ordered to pay T the full amount owing. The Court of Appeal concluded that the motions judge erred in determining that the banks should bear the loss and T’s action for conversion could not succeed.
Held (McLachlin C.J. and Wagner, Côté and Rowe JJ. dissenting): The appeal should be allowed and the decision of the motions judge restored.
Per Abella, Moldaver, Karakatsanis, Gascon and Brown JJ.: The question at the heart of this case is which innocent party — T or the collecting banks — should bear the loss resulting from fraud? The Bills of Exchange Act should be interpreted in such a way that drawers and banks are exposed to the risks created by the fraudulent use of the system, but the banks are the more significant beneficiaries of the bills of exchange system. It is therefore appropriate, in certain circumstances, for them to bear risks and losses associated with that system. To allocate losses to the drawer for having failed to identify and detect the fraud is inconsistent with the strict liability tort of conversion, which makes any negligence on the part of the drawer or the banks in preventing the fraud irrelevant. The Court has, in multiple decisions, provided a two‑step framework which outlines what a bank must prove to demonstrate that a payee is fictitious or non‑existing. The first step — the subjective fictitious payee inquiry — asks whether the drawer intends to pay the payee. A payee is fictitious when the drawer does not intend to pay the payee, meaning that the payee’s name is inserted by way of pretence only. The underlying rationale behind the fictitious payee rule is that if the drawer did not intend that the payee receive payment, such as in cases of fraud, the drawer should not be able to recover from the bank. As a result, if the drawer does not intend to pay the payee, the payee will be fictitious, the cheque will be payable to bearer, and the banks will be able to rely on the defence in s. 20(5) . In this sense, the fictitious payee analysis is subjective. The Court’s interpretation of fictitious payees as incorporating a subjective standard is deeply rooted in the common law, which s. 20(5) of the Bills of Exchange Act was intended to codify. This approach is also sensitive to commercial realities. Attributing an intention to pay recognizes that, particularly in a large corporation, a specific intention by the guiding mind of the corporation is not directed to each individual cheque. To require such an intention would ignore the realities of the cheque issuing process in many organizations.
If the bank proves that the drawer lacked such intent to pay the payee, then the payee is fictitious and the drawer is liable. If the bank does not prove that the drawer lacked such intent, then the payee is not fictitious, and the analysis proceeds to step two. The second step — the objective non‑existing payee inquiry — asks if the payee is either (1) a legitimate payee of the drawer; or (2) a payee who could reasonably be mistaken for a legitimate payee of the drawer. If neither of these is satisfied, then the payee does not exist, and the drawer is liable. If either is satisfied, then the payee exists, and the bank is liable. Whether a payee is non‑existing is a simple question of fact, not depending on anyone’s intention.
There is no reason to create a new version of this test. In enacting s. 20(5) , Parliament intended to codify the common law false payee defence, including subjective considerations. No express language in s. 20(5) ousted these subjective considerations. There are no compelling reasons that the past precedents of the Court were wrongly decided and should be overruled. The fact that there are dissenting opinions on this issue is not a basis for overruling a precedent. Further, there is no evidence that the jurisprudence on fictitious and non‑existing payees reflects unsound public policy on the allocation of risk. Banks are well‑situated to handle the losses arising from fraudulent cheques, allowing those losses to be distributed among users, rather than by potentially bankrupting individuals or small businesses which are the victims of fraud.
In this case, since M was not lawfully entitled to the cheques, the banks are prima facie liable for conversion. It is accepted that T did not participate in the fraud. It follows that none of the payees were fictitious. Further, all payees were either (1) known customers of T’s; or (2) companies whose names could reasonably have been mistaken for its actual customers, such that all payees existed. Therefore, none of the payees in this case were either fictitious or non‑existing. As a result, the defence in s. 20(5) does not apply and the banks are liable for conversion.
Per McLachlin C.J. and Wagner, Côté and Rowe JJ. (dissenting): A simplified, objective approach to the interpretation of s. 20(5) of the Bills of Exchange Act should be followed. The current focus placed on subjective intentions and the existence of reasonable beliefs in the mind of the drawer brings uncertainty to Canada’s negotiable instruments and payment system. The payees here are fictitious and non‑existing on an objective interpretation of s. 20(5) , and therefore, the banks should be entitled to rely on s. 20(5) as a defence to the tort of conversion. The appeal should be dismissed and past precedents from the Court which adopted a subjective approach should be overruled.
Under this proposed approach, the first step in determining whether an instrument ought to be considered as payable to bearer under s. 20(5) of the Act involves determining whether the payee is a non‑existing person. Under an objective approach, a payee will be non‑existing where the payee does not in fact exist at the time the instrument is drawn. The non‑existence of the payee obviously makes endorsement by this person impossible. Thus, such a cheque may be treated as payable to the bearer, providing the banks with a defence to the tort of conversion.
If the payee is an existing person, then a second inquiry is required to determine if the payee is fictitious. A payee will be fictitious where there is no real transaction between the drawer and the payee. By definition, or necessary implication, a payee who is non‑existing is also fictitious (given that there can be no real transaction with a person that does not exist). But a payee who is a real person can nevertheless be fictitious. This is the case where the payee, despite being a real person, is not entitled to the proceeds of the cheque because there is no underlying transaction with the drawer.
This approach does away with all considerations of intent. Where a cheque is drawn to the order of a person who does not in fact exist, or to the order of a person who exists but who is not entitled to the proceeds of the cheque, s. 20(5) will apply, regardless of the intent of the parties involved in the creation of the cheque. It does not matter that such a situation is the result of a deliberate choice, of an innocent mistake by the drawer, or, as is the case here, of fraud committed on the drawer. This approach to s. 20(5) is not novel. Rather, it returns Canadian jurisprudence to the principles underlying the earliest interpretation of s. 20(5) .
This interpretation supports the purpose of the bills of exchange system. The principles of negotiability, certainty, and finality are integral to the operation of the Act. To give effect to these principles, the negotiability of a cheque must be determinable on its face. Otherwise, the efficiency created by the bills of exchange system would be undermined as collecting banks would be required to conduct an investigation into subjective factors to determine the validity of every cheque. Rather than requiring a bank to verify subjective intent and drawer belief, it is more congruent with the purpose of the Act to adopt an interpretation that encourages drawers, prior to the drawing of a cheque, to ensure that the cheque is drawn for a real transaction. A bank’s legal position will no longer depend on facts unknown to it.
The policy rationales for this approach are significant. First, the proposed objective approach allocates the risk of losses from cheque fraud to the party in the best position to detect and minimize such fraud: the drawer. Where a drawer is fraudulently induced into drawing a cheque to the order of someone with whom the drawer has no real transaction, the drawer will bear the loss. It matters not whether the fraudster was an employee or a third party, whether the fraudster might be the directing mind, or whether the payee is real. In all such a cases, the banks will be able to successfully avail themselves of the protection granted by s. 20(5) against an action in conversion by the drawer. The drawer is the party in the best position to detect and prevent cheque fraud, since it is able to implement cheque approval policies and fraud detection measures such as audits. By contrast, banks are not in the best position to prevent cheque fraud on the drawer. The second policy rationale for this approach is that it simplifies the analysis to be performed ex post facto by courts to determine whether a payee is non‑existing or fictitious under s. 20(5) .
The Court should not continue to apply an interpretation of s. 20(5) that is inconsistent with the purpose of the Act and the principles underlying the bills of exchange system. Although the Court does not lightly depart from its own precedents, there are compelling reasons to do so in this case. Courts have struggled to apply the subjective approach. The proposed objective approach will add much needed predictability to the s. 20(5) analysis and increase certainty. It offers a needed course correction that will return the jurisprudence to a proper interpretation of s. 20(5) .
In this case, two payees were invented by M and did not in fact exist. They are therefore non‑existing under s. 20(5) . The other four payees are real entities. However, the cheques were for false purchase orders and thus there were no underlying transactions with the payees. Accordingly, all payees in this second group were fictitious under s. 20(5) . In the result, the banks were entitled to treat all the cheques as payable to bearer.
Cases Cited
By Abella J.
Applied: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727; Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, [1982] 2 S.C.R. 488; Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., [1977] 2 S.C.R. 456; not followed: Bank of England v. Vagliano Brothers, [1891] A.C. 107; referred to: Metroland Printing, Publishing and Distribution Ltd. v. Canadian Imperial Bank of Commerce (2002), 158 O.A.C. 111; Clutton v. Attenborough & Son, [1897] A.C. 90; Vinden v. Hughes, [1905] 1 K.B. 795; North and South Wales Bank Ltd. v. Macbeth, [1908] A.C. 137; Harley v. Bank of Toronto, [1938] 2 D.L.R. 135; Bank of Toronto v. Smith, [1950] 3 D.L.R. 169; Banque de Montréal v. Barbeau, [1963] B.R. 753; Fix Fast Ltd. v. Royal Bank of Canada, Que. Sup. Ct., No. 681,011, May 21, 1970; Metroland Printing, Publishing & Distribution Ltd. v. Canadian Imperial Bank of Commerce (2001), 14 B.L.R. (3d) 212; Canada v. Craig, 2012 SCC 43, [2012] 2 S.C.R. 489; Kepitigalla Rubber Estates, Ltd. v. National Bank of India, Ltd., [1909] 2 K.B. 1010.
By Côté and Rowe JJ. (dissenting)
Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727; Clutton v. Attenborough & Son, [1897] A.C. 90; 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; Canada v. Craig, 2012 SCC 43, [2012] 2 S.C.R. 489; Grant v. Vaughan (1764), 3 Burr. 1516, 97 E.R. 957; Minet v. Gibson (1789), 1 R.R. 754; Tatlock v. Harris (1789), 3 T.R. 174, 100 E.R. 517; Vinden v. Hughes, [1905] 1 K.B. 795; North and South Wales Bank Ltd. v. Macbeth, [1908] A.C. 137; Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, [1982] 2 S.C.R. 488; Bazley v. Curry, [1999] 2 S.C.R. 534; Westboro Flooring and Décor Inc. v. Bank of Nova Scotia (2004), 71 O.R. (3d) 723, aff’g 2002 CanLII 7479; Sriskandarajah v. United States of America, 2012 SCC 70, [2012] 3 S.C.R. 609; R. v. Bernard, [1988] 2 S.C.R. 833; R. v. Chaulk, [1990] 3 S.C.R. 1303; R. v. Henry, 2005 SCC 76, [2005] 3 S.C.R. 609; Ontario (Attorney General) v. Fraser, 2011 SCC 20, [2011] 2 S.C.R. 3; Nishi v. Rascal Trucking Ltd., 2013 SCC 33, [2013] 2 S.C.R. 438; Minister of Indian Affairs and Northern Development v. Ranville, [1982] 2 S.C.R. 518; R. v. B. (K.G.), [1993] 1 S.C.R. 740; Metroland Printing, Publishing & Distribution Ltd. v. Canadian Imperial Bank of Commerce (2001), 14 B.L.R. (3d) 212, aff’d (2002), 158 O.A.C. 111; Rouge Valley Health System v. TD Canada Trust, 2012 ONCA 17, 108 O.R. (3d) 561; R. v. Robinson, [1996] 1 S.C.R. 683.
Statutes and Regulations Cited
Bills of Exchange Act, R.S.C. 1985, c. B‑4, ss. 9 , 20(5) , 48 , 165(3) .
Bills of Exchange Act, 1882 (U.K.), 45 & 46 Vict., c. 61, ss. 7(3), 97(2).
Bills of Exchange Act, 1890, S.C. 1890, c. 33, s. 7(3).
Limitations Act, 2002, S.O. 2002, c. 24, Sch. B.
Authors Cited
Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes, 18th ed. by S. J. Gleeson. London: Sweet & Maxwell, 2017.
Chalmers, M. D. A Digest of the Law of Bills of Exchange, Promissory Notes & Cheques, 3rd ed. London: Stevens and Sons, 1887.
Chalmers, M. D. A Digest of the Law of Bills of Exchange, Promissory Notes, Cheques, and Negotiable Securities, 9th ed. London: Stevens & Sons, 1927.
Chalmers, M. D. “Vagliano’s Case” (1891), 7 L.Q.R. 216.
Comment. “The Fictitious Payee and the UCC — The Demise of a Ghost” (1951), 18 U. Chicago L. Rev. 281.
Craies, William Feilden. A Treatise on Statute Law, 4th ed. by Walter S. Scott. London: Sweet & Maxwell, 1936.
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, vol. 2, 8th ed. by Bradley Crawford. Toronto: Canada Law Book, 1986.
Crawford, Bradley. The Law of Banking and Payment in Canada, vol. 3. Aurora, Ont.: Canada Law Book, 2008 (loose‑leaf updated 2017, release 22).
Falconbridge on Banking and Bills of Exchange, 7th ed. by Arthur W. Rogers. Toronto: Canada Law Book, 1969.
Falconbridge, John Delatre. Banking and Bills of Exchange, 6th ed. Toronto: Canada Law Book, 1956.
Geva, Benjamin. “Conversion of Unissued Cheques and the Fictitious or Non‑Existing Payee — Boma v. CIBC” (1997), 28 Can. Bus. L.J. 177.
Geva, Benjamin. “The Fictitious Payee After Teva v. BMO: Has the Pendulum Swung Back Far Enough?” (2016), 31 B.F.L.R. 607.
Geva, Benjamin. “The Fictitious Payee and Payroll Padding: Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd.” (1978), 2 Can. Bus. L.J. 418.
Geva, Benjamin. “The Fictitious Payee Strikes Again: The Continuing Misadventures of BEA s. 20(5)” (2015), 30 B.F.L.R. 573.
Holden, J. Milnes. The History of Negotiable Instruments in English Law. London: Athlone Press, 1955.
Mohamed, Munaf, and Jordan McJannet. “The Employer, the Bank, and the Fraudster: Vicarious Liability and Boma Manufacturing Ltd. v. CIBC” (2005), 20 B.F.L.R. 465.
Ogilvie, M. H. “The Tort of Conversion and the Collecting Bank: Teva Canada Ltd. v. Bank of Nova Scotia” (2012), 91 Can. Bar Rev. 733.
Rafferty, Nicholas, and Jonnette Watson Hamilton. “Is the Collecting Bank now the Insurer of a Cheque’s Drawer against Losses Caused by the Fraud of the Drawer’s Own Employee?” (2005), 20 B.F.L.R. 427.
Rogers, James Steven. The Early History of the Law of Bills and Notes: A Study of the Origins of Anglo‑American Commercial Law. Cambridge: Cambridge University Press, 1995.
Sullivan, Ruth. Sullivan on the Construction of Statutes, 6th ed. Markham, Ont.: LexisNexis, 2014.
APPEAL from a judgment of the Ontario Court of Appeal (Weiler, Laskin and Cronk JJ.A.), 2016 ONCA 94, 129 O.R. (3d) 1, 344 O.A.C. 344, 52 B.L.R. (5th) 171, 394 D.L.R. (4th) 298, [2016] O.J. No. 581 (QL), 2016 CarswellOnt 1483 (WL Can.), setting aside a decision of Whitaker J., 2014 ONSC 828, [2014] O.J. No. 799 (QL), 2014 CarswellOnt 1955 (WL Can.). Appeal allowed, McLachlin C.J. and Wagner, Côté and Rowe JJ. dissenting.
Colby Linthwaite, Fred Tayar and Daniel Baum, for the appellant.
Frank J. McLaughlin, Paul Steep and Shanique M. Lake, for the respondent TD Canada Trust.
Martin Sclisizzi, Caitlin Sainsbury and Heather Pessione, for the respondent the Bank of Nova Scotia.
Irwin I. Liebman and Moe F. Liebman, for the intervener.
The judgment of Abella, Moldaver, Karakatsanis, Gascon and Brown JJ. was delivered by
[1] Abella J. — A pharmaceutical company was the victim of a fraudulent cheque scheme implemented by one of its employees. It claimed that the collecting banks involved in negotiating the fraudulent cheques are liable for conversion. Under s. 20(5) of the Bills of Exchange Act ,[1] it is a defence to the tort of conversion if cheques are made out to fictitious or non-existing payees.
[2] The banks argued that the payees in this case were fictitious or non-existing and that they were not, as a result, liable for conversion.
[3] The tort of conversion involves the wrongful interference with the goods of another. Where a collecting bank pays out on a forged endorsement, it will be liable for conversion. Conversion is a strict liability tort. As a result, a bank may be held liable whether or not it was negligent. Any alleged contributory negligence on the part of the drawer is, as a result, also irrelevant.
[4] Liability for conversion can be avoided if a bank can bring itself within s. 20(5) of the Act, which states:
Fictitious payee
(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer.
[5] This Court explained the implications of s. 20(5) in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727, as follows:
[Section 20(5)] provides that, where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. The significance of a cheque that is payable to bearer, rather than to order, is that it can be negotiated by simple “delivery” to the bank; endorsement is not required. The presence or absence of a legitimate or forged endorsement is irrelevant to a bearer cheque. A bank becomes the lawful holder of a bearer cheque simply through delivery. By contrast, in order for a bank to become the lawful holder of a cheque that is payable to order, not only must the cheque be delivered to effect negotiation, but the cheque must also be endorsed. 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 endorsements and the missing endorsements; to repeat, negotiation of a bearer cheque is achieved simply by delivery. [para. 45]
[6] In other words, when a bank transfers funds to an “improper” recipient, it is liable under the strict liability tort of conversion unless a statutory defence succeeds. And the statutory defence in s. 20(5) operates by rendering the impugned cheque “payable to bearer”, such that mere delivery — without endorsement — effects negotiation. The cheque would otherwise be “payable to order”, require an endorsement, and, without such endorsement, be wrongly converted by the bank.
[7] This Court has also, in multiple decisions, provided what is, in essence, a two-step framework which outlines what a bank must prove to demonstrate that a payee is fictitious or non-existing. Step one — the subjective fictitious payee inquiry — asks whether the drawer intends to pay the payee. If the bank proves that the drawer lacked such intent, then the payee is fictitious, the analysis ends and the drawer is liable. If the bank does not prove that the drawer lacked such intent, then the payee is not fictitious, and the analysis proceeds to step two. Step two — the objective non-existing payee inquiry — asks if the payee is either (1) a legitimate payee of the drawer; or (2) a payee who could reasonably be mistaken for a legitimate payee of the drawer. If neither of these is satisfied, then the payee does not exist, and the drawer is liable. If either is satisfied, then the payee exists, and the bank is liable.
[8] It is accepted that Teva did not participate in the fraud. It follows that none of the payees were fictitious. Further, all payees were either (1) known customers of Teva’s; or (2) companies whose names could reasonably have been mistaken for its actual customers, such that all payees existed. In my respectful view, therefore, and based on this Court’s jurisprudence, none of the payees in this case were either fictitious or non-existing. As a result, the defence in s. 20(5) does not apply and the banks are liable for conversion.
Background
[9] Neil Kennedy McConachie was Teva Canada Limited’s Finance Manager. He implemented a fraudulent scheme which involved drafting false cheque requisition forms for business entities with similar or identical names to those of Teva’s real customers. Based on McConachie’s fraudulent forms, Teva’s accounts payable department issued the cheques and mechanically applied the requisite signatures. McConachie registered the business names as sole proprietorships and opened bank accounts at several banks, including the Bank of Montreal, Bank of Nova Scotia and TD Canada Trust. He deposited 63 fraudulent cheques totaling $5,483,249.40 into these accounts and eventually removed the funds.
[10] The fraudulent cheques were made payable to payees with six different names. Two of those names, PCE Pharmacare and Pharma Team System, resembled the names of existing customers to whom no debt was owed: PCE Management Inc. and Pharma Systems. The four other names, Pharmachoice, London Drugs, Pharma Ed Advantage Inc. and Medical Pharmacies Group, were legitimate Teva customers to whom no debt was owed.
[11] When Teva discovered the fraud in 2006, it fired McConachie.
[12] In June 2007, Teva filed a claim against the collecting banks claiming that they were liable for conversion.
[13] TD Canada Trust and Bank of Nova Scotia raised the following defences before the motions judge, Whitaker J.:
• The cheques were made payable to either a non-existing entity or a fictitious entity, and therefore became payable to the bearer pursuant to s. 20(5) of the Bills of Exchange Act . As bearer instruments, the cheques were properly delivered to the banks and no endorsement was required.
• The cheques were deposited to the credit of the account holder, with the account holder being the named payee of the cheques, and the banks were holders in due course pursuant to s. 165(3) of the Bills of Exchange Act . No endorsements were therefore required.
• The claim is statute-barred under the Ontario Limitations Act, 2002, S.O. 2002, c. 24, Sch. B.
[14] Only the banks’ first defence, based on s. 20(5) of the Bills of Exchange Act , is at issue in this appeal.
[15] Whitaker J. found that the payees were not fictitious or non-existing within the meaning of s. 20(5) of the Act and that there was “a rational basis for concluding that cheques were apparently made payable to existing clients” (2014 ONSC 828, at para. 33 (CanLII)). He also found that “the payees could plausibly be understood to be real entities and customers of the plaintiff” (para. 34). As a result, based on this Court’s decision in Boma and the Ontario Court of Appeal’s decision in Metroland Printing, Publishing and Distribution Ltd. v. Canadian Imperial Bank of Commerce (2002), 158 O.A.C. 111, the banks could not rely on the defence in s. 20(5) of the Act and were ordered to pay Teva the full amount.
[16] The Court of Appeal concluded that the motions judge erred in determining that the banks should bear the loss (129 O.R. (3d) 1). It found that the two payees whose names were invented by McConachie — PCE Pharmacare and Pharma Team System — were non-existing within the meaning of s. 20(5) of the Act. It also concluded that the four payees with names identical to existing customers of Teva were fictitious. As a result, the banks were entitled to treat all the cheques as payable to bearer, and Teva’s action for conversion could not succeed.
Analysis
[17] The question at the heart of this case is which innocent party — Teva or the collecting banks — should bear the loss resulting from the fraud?
[18] The Bills of Exchange Act does not define the terms “fictitious” or “non-existing”. As a result, the contours of these terms have been left to the courts to determine. It must fairly be acknowledged that in dealing with loss arising from cheque fraud, the apportionment between two innocent parties is inevitably challenging — and has often been challenged. Yet in my view, the policy choices made by this Court seem to me to strike the appropriate balance and assist in maintaining the efficiency and efficacy of the bills of exchange system.
[19] It is helpful to set out the history that led to this Court’s interpretation of s. 20(5) . Section 20(5) of the Bills of Exchange Act , like most of the Act, was largely based on the U.K. Bills of Exchange Act, 1882, 45 & 46 Vict., c. 61. Section 7(3) of the U.K. Act stated that “[w]here the payee is a fictitious or non-existing person the bill may be treated as payable to bearer.” This language, adopted in the Canadian legislation in 1890 (The Bills of Exchange Act, 1890, S.C. 1890, c. 33, s. 7(3)), has not been amended since.
[20] Prior to the legislation, the common law rule with respect to fictitious and non-existing payees was articulated as follows:
In the hundred years that elapsed between the early English cases and the great codifications of negotiable instruments law, the rule was generally accepted to be that “a bill payable to a fictitious person or his order is in effect a bill payable to bearer, and may be declared on as such, in favor of a bona fide holder . . . against all the parties knowing that the payee was a fictitious person.” [Footnote omitted.]
(Comment, “The Fictitious Payee and the UCC — The Demise of a Ghost” (1951), 18 U. Chicago L. Rev. 281, at p. 282)
[21] Professor Benjamin Geva highlighted the rationale behind this rule:
The pre-Act rationale of the fictitious payee rule, as stated in the case law, was estoppel against a party with knowledge of the fraud. That is, a drawer or acceptor who knew that the bill did not reflect a real transaction was estopped, usually as against a discounting bank, from raising a defence based on the forged endorsement of the payee whose name was inserted by the creator of the instrument by way of pretense only in order to create a misleading appearance of real transactions between the drawer and acceptor, as well as between the drawer and the payee. [Footnote omitted.]
(“Conversion of Unissued Cheques and the Fictitious or Non-Existing Payee — Boma v. CIBC” (1997), 28 Can. Bus. L.J. 177, at p. 194; see also J. S. Rogers, The Early History of the Law of Bills and Notes (1995), at pp. 223-49.)
[22] The common law therefore weighted subjective considerations under the false payee defence: when a drawer knowingly made out a cheque to a fictitious or non-existent payee, therefore not intending that the cheque carry any commercial validity, the drawer was estopped from denying that the cheque be payable to its bearer.
[23] After the enactment of the U.K. Bills of Exchange Act, 1882, the terms “fictitious” and “non-existing” found in s. 7(3) were interpreted and applied in four influential U.K. cases: Bank of England v. Vagliano Brothers, [1891] A.C. 107 (H.L.); Clutton v. Attenborough & Son, [1897] A.C. 90 (H.L.); Vinden v. Hughes, [1905] 1 K.B. 795 (per Warrington J.); and North and South Wales Bank Ltd. v. Macbeth, [1908] A.C. 137 (H.L.).
[24] The House of Lords briefly departed from the common law requirement of knowledge in 1891 in Vagliano, where it held that s. 7(3) of the U.K. Bills of Exchange Act had modified, not codified the common law. Referring to the omission of any reference to the drawer’s knowledge, the Earl of Selborne observed that “the omission must be taken to have been deliberate and intentional, and that there is no sound principle on which what is so omitted can be supplied by construction” (p. 130).
[25] This interpretation of s. 7(3), however, did not last long. In 1905, in Vinden, Warrington J. refused to follow the objective approach to “fictitious” and “non-existing” payees. The House of Lords itself rejected this approach in 1908 in Macbeth, which reintroduced, with full force, the requirement of knowledge under s. 7(3). It has remained steadfastly in place for a century.
[26] Based on these cases and Canadian jurisprudence such as Harley v. Bank of Toronto, [1938] 2 D.L.R. 135 (Ont. C.A.); Bank of Toronto v. Smith, [1950] 3 D.L.R. 169 (Ont. C.A.), and Banque de Montréal v. Barbeau, [1963] B.R. 753 (Que. C.A.), Dean Falconbridge summarized the approach to fictitious and non-existing payees as follows:
Whether a named payee is non-existing is a simple question of fact, not depending on anyone’s intention. The question whether the payee is fictitious depends upon the intention of the creator of the instrument, that is, the drawer of a bill or cheque or the maker of a note.
In the case of a bill drawn by [the drawer] upon [the drawee] payable to [the payee], the payee may or may not be fictitious or non-existing according to the circumstances:
(1) If [the payee] is not the name of any real person known to [the drawer], but is merely that of a creature of the imagination, the payee is non-existing and is probably also fictitious.
(2) If [the drawer] for some purpose of his own inserts as payee the name of [the payee], 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 [the payee] is the name of a real person known to [the drawer], but [the drawer] 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 [the payee] is the name of a real person, intended by [the drawer] to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that [the drawer] has been induced to draw the bill by the fraud of some other person who has falsely represented to [the drawer] that there is a transaction in respect of which [the payee] is entitled to the sum mentioned in the bill.
(Falconbridge on Banking and Bills of Exchange (7th ed. 1969), by A. W. Rogers, at pp. 482-86)
[27] This Court applied Falconbridge’s four propositions in the three appeals in which it considered s. 20(5) : Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, [1982] 2 S.C.R. 488; Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., [1977] 2 S.C.R. 456; and Boma in 1996.
[28] In Fok Cheong, a case dealing with whether the payee was “fictitious”, the president of a company, Chan, made out a cheque payable to one of the company’s creditors, Looing Weir, never intending that she receive the funds. Chan fraudulently endorsed the cheque in her name and appropriated the funds. In attempting to recoup its losses against the bank, the company argued that the cheque was not payable to bearer because the payee was not fictitious within the meaning of s. 21(5) (subsequently changed to s. 20(5) ) of the Bills of Exchange Act ). The company stressed that the payee was a real person to whom the company owed a real debt.
[29] This Court nevertheless found that the payee was fictitious, concluding that
the cheque in question was from the very outset intended not to be cashed by the payee but rather that it should through a cleverly designed forgery be so negotiated as to be payable to the drawer himself. [p. 490]
The finding of fraudulent intent on the part of the drawer, the president of the company, was held to be sufficient to conclude that the payee of the cheque was fictitious. The bank was therefore entitled to treat the cheque as payable to bearer.
[30] In arriving at its conclusion, this Court applied the rationale articulated in Vagliano, where Lord Herschell said:
. . . whenever the name inserted as that of the 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. [p. 153]
(Cited in Fok Cheong, at p. 490.)
[31] This Court next considered the meaning of “fictitious payee” in Concrete Column. An employee of Concrete Column prepared over 1,000 cheques made payable to two sets of payees who were not entitled to them: individuals whose names came from unknown sources; and individuals employed by Concrete Column but to whom no money was owed. An authorized officer mechanically signed a large number of cheques that included the disputed ones. The dishonest employee took the cheques to the bank and received the amounts stipulated on them. When Concrete Column attempted to recover the lost amount from its bank, the bank invoked what is now s. 20(5) and argued that the payees were non-existing or fictitious. It was therefore entitled to treat the cheques as payable to bearer.
[32] The first set of payees, the imaginary ones, who were not known to Concrete Column, were found to be “non-existing” by the trial judge. Based on existing jurisprudence, the trial judge found that the question of whether a payee is non-existing was to be assessed as a question of fact, without regard to the intent of the drawer. As a result, he held that because the payees were not known to the drawer, they were non-existing. The cheques made out to this set of individuals were therefore payable to bearer, and the claim against the bank for those cheques was dismissed. This finding was not appealed.
[33] With respect to the second set of payees — workers who had been employed by Concrete Column but to whom nothing was owed for the relevant pay period, the trial judge found that the payees were not fictitious. The bank was therefore liable for conversion for this set of cheques. The Court of Appeal upheld the trial judge.
[34] In this Court, Pigeon J., writing for the majority, upheld the trial judge’s conclusion that the employees were not fictitious, relying on the fourth Falconbridge proposition, which, as previously noted, states:
If [the payee] is the name of a real person, intended by [the drawer] to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that [the drawer] has been induced to draw the bill by the fraud of some other person who has falsely represented to [the drawer] that there is a transaction in respect of which [the payee] is entitled to the sum mentioned in the bill.
[35] Pigeon J. dismissed the bank’s argument that the authorized signing officer could not have formed an intention to pay the payees because he signed the cheques mechanically:
Counsel for the appellant maintained that in the case at bar, where the person authorized to sign the cheques did mechanically place his signature on a large quantity of cheques without knowing any of the payees personally, it is not possible to apply the same rule as when a cheque is signed relying on an explicit false declaration, as it was in most of the cases which gave rise to the above-mentioned decisions. I cannot see any valid reason for making such a distinction. On the contrary, in an age when cheques are processed by computer, it is even more necessary to avoid facilitating fraudulent operations. [p. 484]
Though the drawer mechanically placed his signature on a large quantity of cheques, the Court attributed to the drawer an intention to pay the named payee. Or, phrased in terms of the governing legal framework, the bank b