B.M.P. Global Distribution Inc. v. Bank of Nova Scotia

B.M.P. Global Distribution Inc. v. Bank of Nova Scotia
Collection
Supreme Court Judgments
Date
2009-04-02
Neutral citation
2009 SCC 15
Report
[2009] 1 SCR 504
Case number
31930
Judges
McLachlin, Beverley; Binnie, William Ian Corneil; LeBel, Louis; Deschamps, Marie; Rothstein, Marshall
On appeal from
British Columbia
Subjects
Action
Commercial law
Financial institutions
Notes
SCC Case Information: 31930
Decision Content
SUPREME COURT OF CANADA
Citation: B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504
Date: 20090402
Docket: 31930
Between:
B.M.P. Global Distribution Inc.
Appellant
and
Bank of Nova Scotia doing business as the
Scotiabank and the said Scotiabank
Respondent
And:
Bank of Nova Scotia doing business as the
Scotiabank and the said Scotiabank
Appellant
and
B.M.P. Global Distribution Inc., 636651 B.C. Ltd.,
Audie Hashka and Paul Backman
Respondents
Coram: McLachlin C.J. and Binnie, LeBel, Deschamps and Rothstein JJ.
Reasons for Judgment:
(paras. 1 to 94)
Deschamps J. (McLachlin C.J. and Binnie, LeBel and Rothstein JJ. concurring)
______________________________
B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504
B.M.P. Global Distribution Inc. Appellant
v.
Bank of Nova Scotia doing business as the Scotiabank
and the said Scotiabank Respondent
‑ and ‑
Bank of Nova Scotia doing business as the Scotiabank
and the said Scotiabank Appellant
v.
B.M.P. Global Distribution Inc., 636651 B.C. Ltd.,
Audie Hashka and Paul Backman Respondents
Indexed as: B.M.P. Global Distribution Inc. v. Bank of Nova Scotia
Neutral citation: 2009 SCC 15.
File No.: 31930.
2008: May 15; 2009: April 2.
Present: McLachlin C.J. and Binnie, LeBel, Deschamps and Rothstein JJ.
on appeal from the court of appeal for british columbia
Financial institutions — Banks and banking operations — Fraudulent cheque — Banks’ rights to recover money paid under mistake of fact and to trace funds — Collecting bank releasing funds in customer’s account after drawee bank cleared cheque — Customer transferring portion of funds in its account to related accounts — Drawee bank later finding cheque to be fraudulent and requesting assistance of collecting bank to recover funds — Collecting bank restraining funds in customer’s account and related accounts under its control and transferring funds back to drawee bank — Whether drawee bank can recover payment made under mistake of fact — Whether collecting bank had right to claim funds in customer’s account and to trace funds in related accounts.
Restitution — Mistake of fact — Fraudulent cheque — Whether money paid by bank recoverable from payee.
Commercial law — Bills of exchange — Fraudulent cheque — Whether money paid by bank recoverable from payee.
H and B owned interests in BMP, a company operating in British Columbia that distributed non‑stick bakeware. They reached an agreement to sell the right to distribute the bakeware in the United States with a person they had recently met there. They subsequently received an unendorsed cheque of C$904,563 payable to BMP. The cheque was drawn on the account of a company at the Royal Bank (“RBC”). Neither this company nor the name of the sender of the envelope containing the cheque was known to H or B or was apparently linked to the business purchasing the right to distribute the bakeware. H went to a branch of the Bank of Nova Scotia (“BNS”) where BMP held an account to deposit the cheque. BNS did not provide BMP with immediate access to the funds, but eventually received the funds from RBC in the ordinary course of business and released them to BMP. On that day and over the next 10 days, BMP made numerous transfers to other BNS accounts related to H, B, and H’s holding company. RBC subsequently notified BNS that the cheque for $904,563 was counterfeit, as the drawer’s signatures were forged and asked for BNS’s assistance. BNS interrupted all transactions in BMP’s account and in all related accounts and asked BMP for assistance in recovering the proceeds of the forged cheque. BMP insisted on retaining the amount it still held. BNS then restrained the funds in accounts under its control that it linked to the forged cheque. RBC and BNS entered into an agreement by which BNS was, at RBC’s request, to transfer the restrained funds to RBC and RBC was to indemnify BNS for any losses related to the restraint and transfer. BNS transferred $777,336 to RBC.
BMP, H, B, and H’s holding company sued BNS and claimed damages equivalent to the restrained amount, as well as non‑pecuniary, aggravated and punitive damages. The trial judge ordered BNS to pay $777,336 in total pecuniary damages and also awarded damages for wrongful disclosure of information and defamation. In his view, BNS had violated the service agreement as well as the law applicable to banker/customer relations by charging back amounts credited to BMP’s and the related accounts. The Court of Appeal allowed BNS’s appeal against BMP by reducing the latter’s damages to $101. As to the funds traced in the related accounts, the court found that BMP’s transfers were proper and that the cheques were actual bills of exchange and dismissed the appeals against H, B and H’s holding company. In this Court, BMP appealed the Court of Appeal’s reversal of the trial judge’s conclusion on damages and also asked for punitive damages. BNS cross‑appealed on the issue of tracing in the related accounts. It seeks the reversal of the Court of Appeal’s decision and of the trial judge’s damage award in favour of the holders of the related accounts.
Held: The appeal should be dismissed and the cross‑appeal allowed.
If a person pays money to another under a mistake of fact which causes him to make the payment, he or she is prima facie entitled to recover it. The person’s claim may fail, however, if (1) the payor intends that the payee shall have the money at all events or is deemed in law so to intend; (2) the payment is made for good consideration; or (3) the payee has changed his position in good faith or is deemed in law to have done so. Here, RBC had a right to recover the money paid to BMP. RBC’s payment was made on the basis of a forged cheque and the defences are not available to BMP in the circumstances of this case. [22] [24]
RBC, as drawee, provided the funds under the mistaken assumption that the drawer’s signature was genuine. In this situation, the payor cannot be said to have intended the payee to keep the money in any event. Nor is RBC deemed in law to intend that BMP keep the money. First, the principle of finality of payment acts as a general goal, but it does not negate rights that may otherwise accrue to a party and it cannot be raised by a payee as an indiscriminate bar to the recovery of a mistaken payment. Second, ss. 128(a) and 165(3) of the Bills of Exchange Act do not prevent RBC from recovering the money it paid by mistake. BMP did not take the instrument for value, so it was not a holder in due course. Since only a holder in due course can benefit from s. 128 (a), even if RBC was deemed, by payment, to have accepted the forged cheque, it would not be precluded from denying to BMP the genuineness of the signatures of the drawer. Section 165(3) deems the collecting bank to be in the same position as a party who has taken the bill free from any defect of title of prior parties. A bank, however, is not obligated to rely on the s. 165(3) protection when restitution is claimed from it. The payee, BMP, stands as a third party with respect to this protection. The payee may benefit from defences that are inherent in the rules on mistake of fact, but not from the protection of s. 165(3) . Third, nothing in the service agreement between BMP and BNS precluded BNS from returning the funds to RBC. Clause 4.7 of the agreement gives the bank an explicit right to charge back amounts credited to the customer’s account if an instrument is not settled. The settlement referred to in this clause is the receipt of the funds through the banking system, and more particularly through the clearing mechanism available to members of the Canadian Payments Association. Although the restraint of the funds by BNS could not be based on clause 4.7, since BNS had received settlement from RBC, the contract does not preclude the application of the common law where a payment has been made under a mistake of fact. The service agreement is a standard form contract and the doctrine of mistake of fact can be seen as an implied term of the agreement. This is even more true here where a clause of the service agreement explicitly provides that BNS retains its rights under “any law” (clause 17.3). Furthermore, the clearing rules of the Canadian Payments Association could not be relied on to arrive at the conclusion that BMP had a right to the proceeds of the forged cheque. These rules apply only to relations between members of the Association and they themselves provide for the survival of the members’ common law rights (clause 1(b) of Rule A4). They do not create entitlement for third parties and the service agreement did not incorporate the clearing rules for BMP’s benefit. [26‑28] [35] [39‑41] [45] [48] [50-58]
The question whether BMP has given consideration must be answered in the negative in light of the trial judge’s finding of fact that BMP gave no value for the instrument. Lastly, BMP did not change its position. Once the collecting bank receives the funds from the drawee and credits the payee, its role as a collecting bank is terminated. It then becomes the holder of the funds under its contract with its customer. When a customer deposits funds into an account, the customer becomes a creditor of the bank and the bank holds these funds as its own until the customer asks for repayment. Although, once the funds were credited in BMP’s account, BNS’s role was changed from that of a collecting bank to that of a borrower, for the purpose of the change of position analysis, it must be concluded that BNS remained the holder of the funds. Neither BNS as the holder of the funds nor the payee had changed its position, since at the time they were restrained, the funds now claimed by BMP were still credited to its account. [61-64]
All the conditions for recovery of the payment made by mistake are met. As BNS was entitled to give effect to RBC’s claim for restitution of the moneys paid under mistake of fact, the jus tertii argument fails. The rightful owner had a legitimate claim against the recipient, and BNS had no duty to give preference to BMP. BMP insisted on retaining the funds even though it had given no consideration for them and even though the fraud was beyond dispute. BMP did not lose anything because the funds had to be returned to RBC. BNS’s actions entailed no risk of curtailing the protection from which a holder in due course is entitled to benefit. Finally, there are no policy considerations that would preclude BNS from responding to RBC’s common law right in this case. [65-73]
BNS had the right to claim the amount in BMP’s account and to trace funds in the related accounts. There is no issue of identification of the money in BMP’s account. The unchallenged evidence clearly indicates that it comes from the funds received from RBC. BNS, as agent, received the funds from RBC and, after crediting them to its principal, BMP, received them back under the banking contract. Having received the funds back, BNS had to make restitution to RBC. BNS’s status with respect to the funds in the related accounts is different since BNS was not acting as agent of the holders of the related accounts. It is possible at common law to trace funds into bank accounts if it is possible to identify the funds. When the chain is broken by one of the intervening parties paying from its own funds, identification of the claimant’s funds is no longer possible. However, the clearing system is a neutral factor and does not constitute a systematic break in the chain of possession of the funds. Paying through the clearing system amounts to no more than channelling the funds. Certification also does not affect the traceability of the underlying funds. Here, the funds have not lost their identity. When BNS acted on BMP’s instructions and transferred money to the related accounts, the transferred funds were clearly related to the forged cheque BNS had mistakenly credited to BMP’s account. The fact that some of the related accounts had prior balances is not a bar to recovery. Not only were the balances not substantial, but RBC can trace its own contribution to the balances remaining in the accounts since the withdrawals of all those who received funds far exceeded their contributions. [77] [83‑88]
In light of the conclusion that BNS could resist BMP’s claim on the basis of the doctrine of mistake of fact, BMP’s related claim for punitive damages can only fail. [91‑92]
Cases Cited
Applied: Agip (Africa) Ltd. v. Jackson, [1992] 4 All E.R. 451, aff’g [1992] 4 All E.R. 385; Banque Belge pour l’Étranger v. Hambrouck, [1921] 1 K.B. 321; explained: Bank of Montreal v. The King (1907), 38 S.C.R. 258; referred to: Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd., [1979] 3 All E.R. 522; Royal Bank v. The King, [1931] 2 D.L.R. 685; Royal Bank of Canada v. LVG Auctions Ltd. (1983), 43 O.R. (2d) 582, aff’d (1984), 12 D.L.R. (4th) 768; Toronto‑Dominion Bank v. Pella/Hunt Corp. (1992), 10 O.R. (3d) 634; A.E. LePage Real Estate Services Ltd. v. Rattray Publications (1994), 120 D.L.R. (4th) 499; Central Guaranty Trust Co. v. Dixdale Mortgage Investment Corp. (1994), 24 O.R. (3d) 506; Price v. Neal (1762), 3 Burr. 1354, 97 E.R. 871; Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548; St. Martin Supplies Inc. v. Boucley, [1969] C.S. 324; Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727; Bank of Montreal v. Attorney General of Quebec, [1979] 1 S.C.R. 565; Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110; Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711; National Bank of Greece (Canada) v. Bank of Montreal, [2001] 2 F.C. 288; Bank of Nova Scotia v. Regent Enterprises Ltd. (1997), 157 Nfld. & P.E.I.R. 102; Toronto‑Dominion Bank v. Dauphin Plains Credit Union Ltd. (1992), 90 D.L.R. (4th) 117, rev’d (1992), 98 D.L.R. (4th) 736, leave to appeal refused, [1993] 2 S.C.R. vii; Rural Municipality of Storthoaks v. Mobil Oil Canada, Ltd., [1976] 2 S.C.R. 147; Foley v. Hill (1848), 2 H.L.C. 28, 9 E.R. 1002; Bank Canadian National v. Gingras, [1977] 2 S.C.R. 554; British American Continental Bank v. British Bank for Foreign Trade, [1926] 1 K.B. 328; Bavins, Junr. & Sims v. London and South Western Bank, Ltd., [1900] 1 Q.B. 270; Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805; Taylor v. Plumer (1815), 3 M. & S. 562, 34 E.R. 721; Foskett v. McKeown, [2001] 1 A.C. 102; Lawrie v. Rathbun (1876), 38 U.C.Q.B. 255; Carter v. Long & Bisby (1896), 26 S.C.R. 430; Centrac Inc. v. Canadian Imperial Bank of Commerce (1994), 21 O.R. (3d) 161.
Statutes and Regulations Cited
Bills of Exchange Act, R.S.C. 1985, c. B‑4, ss. 48(1) , 55(1) (b), 128 (a), (b), 165(3) .
Authors Cited
Ames, J. B. “The Doctrine of Price v. Neal” (1891), 4 Harv. L. Rev. 297.
Birks, Peter. “Overview: Tracing, Claiming and Defences”, in Peter Birks, ed., Laundering and Tracing. Oxford: Clarendon Press, 2003.
Crawford, Bradley. 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., vol. 1. Toronto: Canada Law Book, 1986.
Crawford, Bradley. Payment, Clearing and Settlement in Canada, vol. 1, Policies, Institutions and Systems. Aurora, Ont.: Canada Law Book, 2002.
Fridman, G. H. L. Restitution, 2nd ed. Scarborough, Ont.: Carswell, 1992.
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. “Reflections on the Need to Revise the Bills of Exchange Act — Some Doctrinal Aspects: Panel Discussion” (1981‑82), 6 Can. Bus. L.J. 269.
Goff of Chieveley, Lord, and Gareth Jones. The Law of Restitution, 6th ed. London: Sweet & Maxwell, 2002.
Goode, R. M. “The Right to Trace and its Impact in Commercial Transactions — I” (1976), 92 L.Q. Rev. 360.
Hall, Geoff R. Canadian Contractual Interpretation Law. Markham, Ont.: LexisNexis, 2007.
Klinck, Dennis R. “‘Two Distincts, Division None’: Tracing Money into (and out of) Mixed Accounts” (1988), 2 B.F.L.R. 147.
Maddaugh, Peter D., and John D. McCamus. The Law of Restitution. Aurora, Ont.: Canada Law Book, 2004 (loose‑leaf updated August 2008, release 4).
Millett, Peter J. “Tracing the Proceeds of Fraud” (1991), 107 L.Q. Rev. 71.
Ogilvie, M. H. Bank and Customer Law in Canada. Toronto: Irwin Law, 2007.
Scott, Stephen A. “Comment on Benjamin Geva’s Paper: ‘Reflections on the Need to Revise the Bills of Exchange Act — Some Doctrinal Aspects’” (1981‑82), 6 Can. Bus. L.J. 331.
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.
Smith, Lionel D. The Law of Tracing. Oxford: Clarendon Press, 1997.
Ulph, Janet. “Retaining Proprietary Rights at Common Law Through Mixtures and Changes”, [2001] L.M.C.L.Q. 449.
Ziegel, Jacob S., Benjamin Geva and R. C. C. Cuming. Commercial and Consumer Transactions: Cases, Text and Materials, 3rd ed., vol. II, Negotiable Instruments and Banking by Benjamin Geva. Toronto: Emond‑Montgomery, 1995.
APPEAL and CROSS‑APPEAL from a judgment of the British Columbia Court of Appeal (Huddart, Saunders and Low JJ.A.), 2007 BCCA 52, 24 B.L.R. (4th) 201, 278 D.L.R. (4th) 501, 3 W.W.R. 649, 235 B.C.A.C. 252, 388 W.A.C. 252, 63 B.C.L.R. (4th) 214, [2007] B.C.J. No. 137 (QL), 2007 CarswellBC 155, allowing an appeal and dismissing a cross‑appeal from a decision of Cohen J., 2005 BCSC 1091, 8 B.L.R. (4th) 247, [2005] B.C.J. No. 1662 (QL), 2005 CarswellBC 1826. Appeal dismissed and cross‑appeal allowed.
Paul E. Jaffe and Dean Fox, for the appellant and the respondents on cross-appeal.
D. Geoffrey G. Cowper, Q.C., Brook Greenberg and Jennifer Francis, for the respondent/appellant on cross-appeal.
The judgment of the Court was delivered by
Deschamps J. —
1. Facts
[1] The issue in this case is whether a bank must pay damages to customers for debits made from their accounts when reversing credits that had been entered in relation to a forged cheque. The trial judge, although acknowledging that his conclusion was absurd, found for the holders of the accounts. With respect, I agree with the Court of Appeal, albeit for different reasons, that the law does not dictate such a result. I also conclude that where money has been transferred in circumstances in which it can still be identified, tracing is permitted.
[2] As Saunders J.A. wrote for the Court of Appeal, the tale in this case is a strange one. It started when Audie Hashka and Paul Backman met Sunn Newman in the United States. Newman was said to be associated with a concern called Sunrise Marketing. Hashka and Backman owned interests in the appellant, B.M.P. Global Distribution Inc. (“BMP”), a company operating in British Columbia that distributed non‑stick bakeware without any formal licence or written agreement with its supplier. As the trial judge found, neither party was known to the other and neither had any business information concerning the other. According to Hashka and Backman, upon their return to Canada, an oral agreement was reached by telephone that Newman or Sunrise Marketing would purchase the right to distribute the bakeware in the United States. In the trial judge’s words, “Backman agreed that Hashka arrived at the price of US $1.2 million by pulling the number out of the air” (2005 BCSC 1091, 8 B.L.R. (4th) 247, at para. 13). No projected cash flow statements, business plans or marketing plans were used as a basis for the negotiations, and BMP had conducted no research into Newman or Sunrise Marketing. The trial judge added: “Further, Newman did not request copies of BMP Global’s financial statements or sales records (indicating a net loss of approximately $3,500), nor did BMP Global offer to provide this kind of information to Newman” (para. 13). According to Backman, he and Hashka decided to do business with Newman because he “was a sharp-looking guy that seemed like he had a lot of potential”. Hashka testified that Newman “seemed like a businessman” because he “dressed well”.
[3] On October 22, 2001, Hashka went to a Burnaby branch of the Bank of Nova Scotia (“BNS”) where BMP held an account. He said that he wanted to deposit an unendorsed cheque for C$904,563 that was payable to BMP. He informed the branch manager that the cheque was a down payment for distributorship rights for BMP’s products in the eastern United States (trial judgment, at para. 20). The cheque was drawn on an account of a corporation called First National Financial Corporation (“First National”) at a Toronto branch of the Royal Bank of Canada (“RBC”). The cheque had been received the same day, without a cover letter, in an envelope on which the sender’s name and address appeared as E. Smith of 6‑6855 Airport Road, Mississauga, Ontario, L4V 1Y9, (416) 312‑7205. Neither the drawer of the cheque nor the sender was known to Hashka or Backman or was apparently linked to Newman. No attempts were made to contact either First National or E. Smith before the cheque was taken to the bank.
[4] On receiving the cheque, BNS recorded it as a deposit to BMP’s account. The cheque was not endorsed. BNS did not provide immediate access to the $904,563, because the funds already credited to the account were not sufficient to cover the amount of the cheque: the balance prior to the deposit was $59.67. The circumstances were so unusual that the branch manager informed Hashka and Backman that the funds would be held until the bank was satisfied that the instrument was authentic (trial judgment, at para. 282). BNS contacted RBC to ensure that there were sufficient funds in First National’s account and that a hold had not been placed on the cheque. BNS eventually received the funds in the ordinary course of business and released them on October 30, 2001. On that date and over the next ten days, BMP made numerous transactions, including a transfer of US$20,000 to a Citibank account in New York City whose holder Hashka and Backman said they did not know. The largest transfers were to accounts of Hashka and Backman and to an account opened on November 2, 2001 in the name of a holding company, 636651 B.C. Ltd., that was wholly controlled by Hashka. The Court of Appeal described this flurry of transactions as a dispersion of funds (2007 BCCA 52, 24 B.L.R. (4th) 201, at para. 11).
[5] The movements of funds involving BMP’s account and the accounts of Hashka, Backman and 636651 B.C. Ltd. can be summarized as follows:
1. On November 5, two cheques drawn on BMP’s account were deposited in the account of 636651 B.C. Ltd., one, certified by BNS, in the amount of $100,000 and the other in the amount of $300,000. Prior to these deposits totalling $400,000, the balance of the account was zero. After the deposits, $7,000 was used to pay travelling expenses and personal expenses incurred by Hashka.
2. A total of $70,000 was transferred from BMP’s account to Backman’s chequing account by way of deposits of $50,000 on October 29 and $20,000 on November 1. Prior to these deposits, the balance in the account was $45.87. A total of $52,351.81 was used to make purchases and retire outstanding debts incurred before the forged cheque was deposited in BMP’s account. A deposit of $17.11 was made on November 3 as a result of a point of sale refund from a Future Shop store.
3. An amount of $3,000 was transferred from Backman’s chequing account to his savings account. The prior balance of the savings account was $74.35. No other deposits were made into this account. From the savings account, $428.56 was used to pay outstanding debts incurred prior to the receipt of the forged cheque.
4. A total of $20,000 was transferred from BMP’s account to Hashka’s account. The prior balance in Hashka’s account was $236.29. In addition, a payroll cheque for $3,022.49 was deposited on October 30. A total of $10,153.91 was used to pay personal debts, day-to-day expenses and entertainment expenses.
5. A certified cheque in the amount of $300,000 dated November 2, drawn by BMP and made to the order of BMP, was taken to the Bank of Montreal. On November 7, a bank draft issued by the Bank of Montreal for $300,100 was deposited by BMP in its account at BNS. No explanation has been provided for the disbursement or the subsequent deposit.
[6] On November 9, 2001, RBC notified BNS that the cheque for $904,563 deposited in BMP’s account on October 22, 2001 was counterfeit, as the drawer’s signatures were forged and asked for BNS’s assistance. BNS interrupted all transactions in BMP’s account and in all related accounts and asked BMP for assistance in recovering the proceeds of the forged cheque. BMP insisted on retaining the amount it still held. BNS then restrained the following amounts in accounts under its control that it had linked to the forged cheque:
BMP’s account $350,188.65
636651’s account $393,000.00
Backman’s chequing account $ 17,711.17
Hashka’s account $ 13,104.87
Backman’s savings account $ 2,645.79
Total $776,650.48
In addition, BNS recovered $685.56 by reversing bill payments made from BMP’s account. (When referring globally to the accounts other than that of BMP, I will call them the “related accounts”.)
[7] On December 6, 2001, RBC and BNS entered into an agreement in which RBC represented and warranted that the “cheque dated October 12, 2001, in the amount of nine hundred and four thousand five hundred and sixty-three dollars ($904,563.00) payable to BMP Global Distribution Inc. was counterfeit . . . [and] was deposited into Scotiabank account number 30460 00178-17 . . . [and] that the proceeds of the Counterfeit Cheque are proceeds of fraud”. Under this agreement, BNS was, at RBC’s request, to transfer the restrained funds to RBC and RBC was to indemnify BNS for any losses related to the restraint and transfer. On December 7, 2001, BNS transferred $777,336.04 to RBC.
[8] BMP’s account was governed by a standard‑form financial services agreement (“service agreement”). The relevant clauses are discussed below.
[9] BMP, Hashka, Backman and 636651 B.C. Ltd. claimed damages equivalent to the restrained amounts, non-pecuniary damages for stress, wrongful disclosure of information and defamation, aggravated and punitive damages. Backman also claimed damages regarding BNS’s failure to honour certain payment instructions while his account was restrained. The issue of damages for stress, wrongful disclosure of information and defamation is not before this Court.
2. Decisions of the Courts Below
2.1 British Columbia Supreme Court, 2005 BCSC 1091, 8 B.L.R. (4th) 247
[10] Cohen J. found that since BMP was not suing to enforce payment of the cheque, whether or not the cheque was a nullity or whether or not accepting BMP’s position would allow a windfall to accrue to BMP had no bearing on the outcome of the litigation (paras. 284-85). In his view, BNS had violated the service agreement as well as the law applicable to banker/customer relations by charging back amounts credited to the accounts of BMP and the other plaintiffs. Cohen J. interpreted the service agreement as incorporating the clearing rules of the Canadian Payments Association (“clearing rules”) and precluding BNS from charging back against its customer’s account. He reasoned that once “final settlement on the deposit of the Counterfeit Cheque had been reached between the BNS and the RBC”, the funds in BMP’s account “went from being a ‘provisional’ credit to being a ‘final’ credit. At that stage the relationship between the BNS and the plaintiffs was that of debtor/creditor” (para. 306). Regarding the related accounts, Cohen J. found that the law prevented a bank charging back against a customer’s account without the customer’s permission. He awarded the plaintiffs pecuniary damages because they had “suffered a loss of their right to demand repayment from the BNS of the BNS’ debt to them by reason of the BNS’ wrongful charge backs against their respective bank accounts” (para. 423). He assessed the total pecuniary damages at $777,336.04, the sum of all the charge backs and the reversed payments. He also awarded Backman $13.50 for a late charge due to BNS’s failure to honour certain payment instructions while his account was restrained. Cohen J. also awarded damages for wrongful disclosure of information and defamation.
2.2 British Columbia Court of Appeal, 2007 BCCA 52, 24 B.L.R. (4th) 201
[11] The unanimous judgment of the Court of Appeal was rendered by Saunders J.A. She framed the issue as a fraud designed to place a credit in BMP’s account for which BMP gave nothing. In her view, the courts were being asked to indirectly complete the fraud. She accepted the trial judge’s finding that BNS had breached its banking agreement when it reversed the credit in BMP’s account over BMP’s opposition. However, she found that two characteristics of the case made it unusual. The first was that
the fact of two banks, and the consequent issues arising of clearing rules and the Bills of Exchange Act , confuse what would be otherwise a simple conclusion in these circumstances. The interposition in the fraudster’s scheme of the Royal Bank of Canada created the screen of the clearing system. In this sense, the fraud may be described as extra-layered. The issue is whether that extra layering, in the circumstances I have just described, entitles BMP to recover from the Bank of Nova Scotia, as ordered by the trial judge. [para. 26]
Indeed, Saunders J.A. said that if only one bank had been involved in the payment, it would have been entitled to debit BMP’s account, because the money was paid under a mistake of fact. The second unusual characteristic was the fact that
BMP is an innocent in the fraud. Thus we know that BMP did not overtly assist the author of the scheme in its iniquitous aspects, whether or not the author has already been paid, unknowingly, by the cheque to Citibank, or was a gratuitous fraudster, or was a fraudster who has not yet presented his bill. For that reason, the many cases concerning recovery of monies from persons implicated in a fraud have no bearing on this case. [para. 27]
[12] Saunders J.A. did not delve further into what she called “the screen of the clearing system”. She went on to find that
on a plain reading of s. 48, the counterfeit cheque, because of the forged signatures on it, was wholly inoperative, setting the stage for a claim for return of monies advanced in reliance upon it.
Section 48 demonstrates the prima facie empty asset that BMP builds its claim around.
In equity, then, would this cheque have provided a basis upon which BMP could hope to retain the funds credited to its account? In my view the answer is no. [paras. 33‑35]
[13] Saunders J.A. then found that it would be against good conscience to give a monetary judgment that would accomplish the substance of the fraud. She added that BMP could not claim the windfall — it had lost nothing: it did not change its position as a result of the charge back. She found that the arguments about the alleged rights of BMP, 636651 B.C. Ltd., Hashka and Backman under the clearing system rules were inconsistent with the principles of equity. She also found that, except for the $100 added to the original amount of $300,000, the funds linked to the bank draft issued by the Bank of Montreal bore the same character as the credit obtained from the deposit of the forged cheque. Thus, BMP could not retain any proceeds essentially derived from fraud. Saunders J.A. awarded BMP nominal damages of $1 for BNS’s reversal of the credit over BMP’s opposition (paras. 30 and 51) plus the remaining $100 from the bank draft, and dismissed the cross-appeal on punitive damages.
[14] As to the funds traced in the related accounts, Saunders J.A. found that the transfers were proper and that the cheques were actual bills of exchange, unlike the forged cheque. Absent a finding that the cheques in question were improper, BNS was entitled only to “a remedy of tracing, or an enquiry into the true ownership of the accounts” (para. 56). The appeals against 636651 B.C. Ltd., Hashka and Backman were thus dismissed.
[15] BMP appeals the Court of Appeal’s reversal of the trial judge’s conclusion on damages and also asks for punitive damages. BNS cross-appeals on the issue of tracing in the related accounts. It seeks the reversal of the Court of Appeal’s decision and of the trial judge’s damages award in favour of the holders of the related accounts.
3. Positions of the Parties
[16] BMP asks that the award of damages be restored. It argues that, whether the claim is viewed as one for debt or for damages for breach of contract, BNS’s liability is the same: “It is not necessary for BMP to prove that it suffered a loss, other than the loss of its right to demand repayment of [the amount credited to] its account [at] BNS” (A.F., at para. 82). BMP also asks for punitive damages to sanction BNS for its conduct.
[17] BNS takes the position that BMP never had any interest in the proceeds of the forged cheque and that it is not entitled to damages, whether general or punitive, resulting from BNS’s decision to return the funds to the victim of the fraud. BNS asserts what is essentially a defence in rem, relying on the inherent nullity of an instrument bearing the forged signatures of the drawer. It argues that this defence suffices for it to resist BMP’s claim. In addition, BNS appeals the decision on the tracing of the funds in the related accounts on the basis that those funds were clearly identified as proceeds of the forged cheque and that none of the parties involved gave any consideration or suffered any detriment. BNS does not contest the $13.50 awarded as damages by the trial judge in relation to a late-payment charge Backman had to pay to a third party.
[18] As the Court of Appeal mentioned, the case would have been simpler had only one bank been involved. However, in my view, BNS was not precluded from acknowledging that RBC could rely on the well-established doctrine of mistake of fact. Moreover, the conditions for tracing the funds in the related accounts are, in my view, met.
[19] In sum, this case is about the restitution of amounts paid by RBC by mistake and the right to trace the proceeds. Since the case can be resolved by applying the common law rules on mistake of fact, I will begin by reviewing those rules. I will then apply the rules to the facts, and in doing so I will explain how the rules apply in the context of the relationship between the drawee and the collecting bank and between the customer and the bank; this will require a further discussion of the common law inasmuch as it has not been changed by the Bills of Exchange Act, R.S.C. 1985, c. B‑4 (“BEA ”). Finally, I will explain why, in my view, BNS could resist the claims of BMP and the holders of the related accounts.
4. Analysis
[20] In Bank and Customer Law in Canada (2007), M. H. Ogilvie writes (at p. 284):
[B]anks make payments by mistake for a variety of reasons, including simple error, either personal or by computer, in making a payment more than once, payment over an effective countermand, payment where there are insufficient funds, or payment of a forged or unauthorized cheque. Prima facie, in these situations, with the exception of insufficient funds which is treated as an overdraft, the bank is liable to reimburse the customer’s account because it is in breach of contract with the customer. But the bank is also permitted to look to the recipient of the mistaken payment for restitution of the sum paid under a mistake of fact.
[21] That a bank has a right to recover from a recipient a payment made under a mistake of fact was made clear in a restatement of the law by Goff J. (as he then was) in Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd., [1979] 3 All E.R. 522 (Q.B.), at p. 541. Canadian courts have long recognized that right on the basis of the analytical framework adopted in Royal Bank v. The King, [1931] 2 D.L.R. 685 (Man. K.B.). Since Simms, however, and I agree with this approach, many Canadian courts have relied on the English case as setting the conditions for recovery in restitution by a bank, subject to Canadian law with respect to change of position, an issue that will be discussed below: Royal Bank of Canada v. LVG Auctions Ltd. (1983), 43 O.R. (2d) 582 (H.C.J.), aff’d (1984), 12 D.L.R. (4th) 768 (Ont. C.A.); Toronto-Dominion Bank v. Pella/Hunt Corp. (1992), 10 O.R. (3d) 634 (Gen. Div.); A.E. LePage Real Estate Services Ltd. v. Rattray Publications (1994), 120 D.L.R. (4th) 499 (Ont. C.A.), at p. 507: “Barclays Bank v. Simms is the accepted authority explaining the obligations of a bank to its customer and its redress against the payee of a cheque who appears to be taking advantage of an innocent mistake on the part of a bank employee”; Central Guaranty Trust Co. v. Dixdale Mortgage Investment Corp. (1994), 24 O.R. (3d) 506 (C.A.), at p. 512, fn. 1; Ogilvie, at p. 285; P. D. Maddaugh and J. D. McCamus, The Law of Restitution (loose‑leaf), at p. 10‑32.
4.1 Simms Test for Recovering Money Paid Under a Mistake of Fact
[22] The test laid down in Simms for recovering money paid under a mistake of fact (at p. 535) is straightforward:
1. If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact.
2. His claim may however fail if: (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; (c) the payee has changed his position in good faith, or is deemed in law to have done so.
[23] The right of BNS to resist the claims of the appellant and the cross-respondents cannot be examined without regard to RBC’s right to ask BNS to transfer the funds. Consequently, RBC’s position is the starting point for the analysis.
4.2 Application of the Test
4.2.1 Prima Facie Right to Recover
[24] On the first step of the Simms test, RBC has a prima facie right to recover. It is common ground that payment was made on the basis of a forged instrument. According to s. 48(1) BEA , a forged signature is wholly inoperative. It does not create a right to give a discharge for the bill or to enforce payment. RBC made the payment before discovering that the drawer’s signatures were forged. BMP no longer disputes the fact that the instrument is a forgery, but it contends that RBC must bear the loss and that BNS was not entitled to restrain the funds and transfer them to RBC. This argument goes to the second step of the test. At the first step, there is no basis for denying that RBC has a prima facie right to recover the funds.
4.2.2 Right of the Payee to Keep the Proceeds, Consideration and Change of Position
[25] I reiterate that the second step of the test involves three enquiries: (1) Did the payor intend that the payee keep the money in any event or is the payor precluded by law from raising the mistake? (2) Did the payee give consideration? (3) Did the payee change its position?
4.2.2.1 Right to Keep the Proceeds
[26] In the first enquiry, the question is whether the payor