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]
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 intends or is deemed in law to
intend the payee to receive the funds. In the case at bar, the drawee provided
the funds under the mistaken assumption that the drawer’s signatures were
genuine. It is not in dispute — and is well settled in law — that RBC, as the
drawee, had no right to pay the cheque out of the funds it held to the credit
of First National, the purported drawer, and that RBC would be liable to
reimburse its customer if it used the customer’s funds to make the payment. Nor
is the relationship between BNS and RBC in dispute. It is that of a collecting
bank receiving funds from the drawee in order to remit them to the payee. The
issue before the Court in this case is whether, as BMP argues, the loss must
fall on the drawee bank.
[27] Where
a drawee provides funds to a collecting bank on presentation of an instrument
bearing a forged signature of the drawer, the drawee will usually — unless a
specific factual context dictates otherwise — be in a position to assert that
it did not intend the payee to keep the funds. As I mentioned above, the
drawee in this situation pays without the authority to do so and is liable to
its customer, who has not signed as the drawer. Without such an instruction from
the drawer, the payor cannot be said to have intended the payee to keep the
money in any event. This is not a case where a party pays a debt it owes or
where other similar circumstances preclude the payor from denying that it
intended the payee to keep the funds.
[28] However,
whether the payor is deemed in law to intend that the payee keep the money
requires further elaboration. BMP put forward three arguments in support of its
claim. The first is that the principle of finality of payment forms part of the
common law and that it prevents the drawee bank from recovering the paid
proceeds of a forged cheque from anyone other than the forger. The second is
that the scheme of the BEA does not allow RBC to recover from BNS or
BMP. The third is that the service agreement between BNS and BMP precludes BNS
from recovering such proceeds from BMP.
4.2.2.1.1 Principle of Finality of Payment
[29] In
Canadian law, the argument that the drawee should bear the loss is sometimes
said to have originated in Bank of Montreal v. The King (1907), 38
S.C.R. 258. I will turn to that case in a moment, but since the two judges
(Girouard J., with whom Maclennan J. concurred) who supported the principle of
finality relied heavily on the older case of Price v. Neal (1762), 3
Burr. 1354, 97 E.R. 871, I will begin by discussing the latter.
[30] In Price
v. Neal, a drawee paid a first bill of exchange bearing a forged signature
of the drawer. He then accepted a second, also bearing a forged signature of
the drawer. After that acceptance, the bearer discounted the second bill,
which the drawee eventually paid. A considerable amount of time elapsed before
the drawee found out that the signatures on both bills were forged. Lord
Mansfield held that the drawee was not entitled to recover in such a case.
[31] Price
v. Neal has been interpreted in various ways over the centuries. One of
the interpretations serves as a basis for a broad statement that the principle
of finality of payment requires the drawee to bear the loss where the drawer’s
signature is forged, irrespective of detrimental reliance (see S. A. Scott,
“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 (“Comment on Reflections”), at p. 342). A second interpretation of Price
v. Neal is that the drawee cannot rely on the forgery after acceptance (or
payment) of a bill bearing a signature he should know to be forged or is deemed
to have negligently omitted to verify. Yet a third interpretation put forward
for Price v. Neal limits its scope to instances where two innocent
parties have equal equities but the holder of the bill has legal title to the
money (see Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548 (H.L.); B.
Geva, “Reflections on the Need to Revise the Bills of Exchange Act — Some
Doctrinal Aspects: Panel Discussion” (1981-82), 6 Can. Bus. L.J. 269
(“Reflections”), at pp. 308-9; J. S. Ziegel, B. Geva and R. C. C. Cuming, Commercial
and Consumer Transactions: Cases, Text and Materials (3rd ed. 1995), vol.
II, at p. 396, citing J. B. Ames, “The Doctrine of Price v. Neal”
(1891), 4 Harv. L. Rev. 297, at pp. 297-99). In view of the various
interpretations of Price v. Neal, I do not accept that it provides a
basis for an unqualified rule that a drawee will never have any recourse
against either the collecting bank or the payee where payment has been made on
the forged signature of the drawer.
[32] In
Canada, Bank of Montreal v. The King is sometimes relied on in support
of the principle of finality of payment. Upon closer examination, however, it
cannot be said to stand for a hard and fast rule that the drawee is in all
circumstances precluded from recovering from the collecting bank. First, the
judges in Bank of Montreal v. The King who invoked Price v. Neal
as having endorsed the principle of finality of payment did not discuss the
third interpretation of that case. Second, the other judges who wrote in Bank
of Montreal v. The King took a far more nuanced approach to the problem of
the forged signature of the drawer.
[33] In Bank
of Montreal v. The King, the bank had honoured cheques bearing the forged
signatures of officers of the Government of Canada. As the Government of
Canada had not authorized the payments, it sought to recover the amounts of the
forged cheques from the Bank of Montreal. The Bank of Montreal in turn took
action against the collecting banks to recover the amounts they had received as
a result of the forged cheques. Four different judges wrote reasons. All of
them concluded that the drawee, the Bank of Montreal, had to return the funds
to the drawer, the Government of Canada. All of them also rejected the claim
against the collecting banks, although the reasons they gave cannot easily be
categorized.
[34] Three
of the five judges in Bank of Montreal v. The King (Davies, Idington
and Duff JJ.) were of the view that if the position of a collecting bank is
altered, that bank can resist a claim by the drawee. Two of the judges (Davies
and Idington JJ.) explicitly rejected Girouard J.’s adoption of the argument, based
on Price v. Neal, of presumed or actual negligence on the drawee’s part
and the third (Duff J.) did not pronounce on it. Therefore, to argue that there
is a clear rule that the drawee must suffer the loss is not supported by what
is labeled as the fons et origo of the Canadian precedents on forged
instruments. In addition, the fact that the Canadian courts subsequently
embraced Simms also weakens the finality of payment argument
significantly in a case involving payment of an instrument bearing a forged
signature.
[35] The
assessment of the drawee’s rights requires a more nuanced enquiry. The
principle of finality of payment underlies both the common law rules and the BEA ’s
provisions and serves as a general goal, but as laudable as it is, it does not
negate rights that may otherwise accrue to a party. It cannot be raised by a
payee as an indiscriminate bar to the recovery of a mistaken payment. I agree
with Scott, “Comment on Reflections”, at p. 342, that:
[N]o very convincing reason can be offered for refusing the drawee relief
in the single instance where the mistake involves acceptance or payment on a
forged drawer’s signature, whilst relief is freely given to the drawee on all other
acceptances or payments by mistake (including indeed various other kinds of
forgeries; even the case where the drawer’s own endorsement is forged on a bill
payable to his order (s. 129(b)) [now s. 128 (b)].
4.2.2.1.2 Provisions of the BEA
[36] On the
issue of whether the payor is deemed in law to intend that the payee keep the
money, two provisions of the BEA warrant comment: ss. 128 (a) and
165(3) . These provisions are relevant in view both of BNS’s role as BMP’s
agent for the purposes of collection on the instrument, and of the special
status granted to a bank that receives an unendorsed cheque.
[37] Section
128 (a) BEA reads as follows:
128. [Estoppel] The acceptor of a bill by accepting it is
precluded from denying to a holder in due course
(a) the existence of the drawer, the genuineness of his
signature and his capacity and authority to draw the bill;
[38] In the
instant case, the drawee (RBC), in requesting restitution from the collecting
bank (BNS), was in fact denying to both the collecting bank and the payee the
genuineness of the drawer’s signatures. Consequently, the question is whether
the payee and the collecting bank were holders in due course and therefore
entitled to rely on s. 128 (a) BEA . I will discuss the payee’s
situation first, because the collecting bank has a special status which, in
this case, is governed by s. 165(3) , to which I will turn below.
[39] The
most common view is that a payee is not, as a general rule, a holder in due
course because he or she has not acquired the instrument by way of negotiation
(s. 55(1) (b) BEA ). Yet in some factual circumstances, dealings
may take place before the payee becomes the holder of the instrument, and some
commentators consider that the negotiation requirement needs to be revisited:
Geva, “Reflections”, at pp. 289 ff.; see also St. Martin Supplies Inc. v.
Boucley, [1969] C.S. 324. This question need not be resolved for the
purposes of the present case, however. It is another requirement for qualifying
as a holder in due course under s. 55(1) (b) BEA that is lacking
here: 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) BEA ,
even if RBC were deemed — by payment — to have accepted the forged cheque, it
would not be precluded from denying to BMP the genuineness of the drawer’s
signatures.
[40] The
other provision that is relevant to RBC’s right to recover the money it paid by
mistake from BNS is s. 165(3) BEA . This provision reads as follows:
165. . . .
(3) Where a cheque is delivered to a bank for
deposit to the credit of a person and the bank credits him with the amount of
the cheque, the bank acquires all the rights and powers of a holder in due
course of the cheque.
[41] According
to this provision, BNS acquired the status of a holder in due course by
receiving the cheque from the payee and crediting the amount to the payee’s
account. Section 165(3) BEA 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. It has the same right as a party who has given consideration.
Consequently, it can be argued that if BNS had chosen to do so, it could have
refused to transfer to RBC the money it held on account of the fraudulent
instrument. However, the question is not whether it could rely on the
protection of s. 165(3) BEA , but whether it could restore the funds to
RBC.
[42] Section
165(3) BEA has been commented on many times. Parliament was initially
criticized for acting at the request of the banking industry without
understanding the potentially wide scope of the amendment (see S. A. Scott,
“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). Then,
following Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce,
[1996] 3 S.C.R. 727, Ogilvie expressed the view in Bank and Customer Law in
Canada, at p. 295, that the effect of the Court’s narrow interpretation of
s. 165(3) has been to make the collecting bank the drawer’s insurer. The least
that can be said is that the interpretation of the scope of s. 165(3) BEA
is taking shape.
[43] No
prior case has concerned the effect s. 165(3) BEA will have where the
deposited instrument bears a forged signature of the drawer. In Boma,
at para. 43, Iacobucci J. explicitly refrained from discussing the
applicability of the defence available to the collecting bank in circumstances
where the instrument might be found not to be a bill of exchange. Although I
have serious doubts about the soundness of an argument which would deprive the
collecting bank of all protection on the basis that the instrument is a sham,
not a cheque, I need not discuss it here in view of my position that the
collecting bank is not required to rely on the protection potentially afforded
by s. 165(3) BEA .
[44] As
Ogilvie clearly points out:
Section 165(3) is drafted in broad terms, with the
obvious policy of protecting a bank from liability in relation to cheques
deposited in a customer’s account by permitting a bank to presume that it was
the drawer’s intention that the payee receive the proceeds of the cheque, in
complete contrast to the earlier law, where a bank enjoyed no such presumption.
[pp. 292-93]
[45] Section
165(3) BEA affords protection to a bank. The bank is not obligated to
rely on this protection when restitution is claimed from it. The payee stands
as a third party with respect to the protection. He or she cannot use the
bank’s shield as a sword against it. The purpose of granting the bank the
status of a holder in due course is not to create an entitlement for the payee
of a forged instrument. The payee may benefit from defences that are inherent
in the rules on mistake of fact, but not from the protection afforded to a bank
by s. 165(3) BEA . In other words, if the forged instrument were held to
be a bill of exchange, BMP could not argue, for the purposes of the Simms
test, that BNS was deemed in law to be entitled to receive the funds irrespective
of the validity of the drawer’s signatures.
4.2.2.1.3 The
Service Agreement
[46] BMP
also argued, and the trial judge agreed, that BNS was not entitled to restrain
the funds and transfer them to RBC because the service agreement governing the
contractual relationship did not authorize this.
[47] Historically,
a contract governing a bank account consisted mainly of implied terms: Bank
of Montreal v. Attorney General of Quebec, [1979] 1 S.C.R. 565, at
p. 569 (per Pratte J.), citing Joachimson v. Swiss Bank Corp.,
[1921] 3 K.B. 110 (C.A.), at p. 117 (per Bankes L.J.). Those terms
were developed by the common law courts, and some of them were later codified
in what is now the BEA .
[48] Today,
most bank account agreements, including the service agreement between BMP and
BNS, are standard form contracts. However, terms may still be implied: Canadian
Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711, at pp.
776-77; G. R. Hall, Canadian Contractual Interpretation Law (2007), at
p. 125. In the instant case, BMP argues that under the service agreement, BNS
could charge back only the credits for which it had not received settlement.
According to BNS, nothing in the service agreement precluded it from returning
the funds to RBC and resisting the claim for damages.
4.2.2.1.3.1 The
Provisional Payment Clause
[49] The
service agreement contains provisions under which amounts may be charged back
in certain circumstances. Clause 4.7 reads as follows:
4.7 You
authorize us to charge the following to any of your accounts, even if they are
not specifically designated for the instruction or service:
· the amount you ask us to pay in any instruction
· the amount of any instruction we have paid to you or credited to
your account and for which we do not receive settlement for any reason
(including fraud, loss or endorsement error) together with all related costs
· payment of any amount you owe us, including
fees, charges, costs and expenses.
[50] The
right to charge back provisional credits when a customer’s instruction to
collect on a bill cannot be carried out has long been recognized at common
law. Clause 4.7 clarifies that right but does not rule out other reversals of
credit that are available at common law. Clause 4.7 gives the bank an explicit
right to charge back amounts credited to the customer’s account if an
instrument is not settled. In the context of the service agreement, it is
clear that 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.
[51] The
trial judge seems to have understood the doctrine of mistake of fact to be
limited to provisional credits or, in other words, to situations where the
collecting bank has not received the funds. This is not so. As a matter of
fact, both the seminal cases of Bank of Montreal v. The King and Royal
Bank v. The King, to which I referred above, concerned forgeries discovered
long after the forged cheques had been paid. In Royal Bank v. The King,
the drawee bank was held to be entitled to claim the amounts of the cheques
from the payee, who was also its customer. Royal Bank v. The King shows
that a bank is not necessarily precluded from claiming funds from the payee
long after the instrument has been cleared.
[52] The
doctrine of mistake of fact is so ingrained in our law that it can be seen as
an implied term of the contract. This is even more true in the case at bar, as
a clause of the service agreement explicitly provides that BNS retains its
rights under “any law”. Clause 17.3 reads as follows:
17.3 This agreement takes precedence over any other agreement,
service request or service materials relating to any instruction or services.
However, we retain all our rights under any law respecting loans, set-off,
deposits and banking matters even if they are not described in this agreement.
[53] 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. Rather, the common law is implicitly incorporated, since it does not
conflict with the explicit terms of the contract. Thus, clause 4.7 is not a
bar to applying the common law to the relationship between BNS and BMP where
BNS’s role is no longer that of a collecting bank.
4.2.2.1.3.2 The
Clearing Rules
[54] In
concluding that BNS did not have the right to restrain the funds and transfer
them to RBC, the trial judge interpreted the service agreement as incorporating
the clearing rules of the Canadian Payments Association. Cohen J. held that
“the Agreement specifically refers to, and incorporates the time limit set out
in the [clearing] [r]ules” (para. 292). With respect, I do not agree that the
clearing rules are an obstacle to recovery.
[55] The
clearing rules themselves provide for the survival of the members’ common law
rights. Clause 1(b) of Rule A4 allows a negotiating bank to seek recourse
outside the clearing system:
Nothing in this Rule precludes a Drawee or a Negotiating Institution from
exercising its rights and seeking recourse outside of the Clearing.
Moreover, the
preamble to the rules contains an express disclaimer of application to third
parties:
Nothing in the Rules shall affect or be interpreted to affect the rights
or liabilities of any party to any Payment Item, except as expressly provided in
the Rules.
[56] It is
also recognized in the authorities that the clearing rules apply only to
relations between members of the Canadian Payments Association and that they do
not create entitlements for third parties. As B. Crawford states in Payment,
Clearing and Settlement in Canada (2002), vol. 1, at p. 168:
. . . it must be abundantly clear in principle that the ACSS Rules, being
internal documents of a corporation, may legitimately govern the relations of
the members of the corporation but cannot place burdens on members of the
public or bestow benefits on them in connection with their use of the CPA’s
clearing and settlement system.
[57] I
agree with the following statement by Evans J.A. in National Bank of Greece
(Canada) v. Bank of Montreal, [2001] 2 F.C. 288 (C.A.), at para. 19:
This system operates only at the level of banking and similar
institutions, and . . . decisions of the compliance panel have no impact on
either the private law rights and duties of banks, their customers, and the payers
and payees of cheques, or the remedies available to enforce them.
(See also Bank
of Nova Scotia v. Regent Enterprises Ltd. (1997), 157 Nfld. &
P.E.I.R. 102 (C.A.), at para. 38; Toronto‑Dominion Bank v. Dauphin
Plains Credit Union Ltd. (1992), 90 D.L.R. (4th) 117 (Man. Q.B.), at p.
121, rev’d on other grounds (1992), 98 D.L.R. (4th) 736 (Man. C.A.), leave to
appeal to SCC refused, [1993] 2 S.C.R. vii.)
[58] Finally,
I disagree with the trial judge that the service agreement governing the
relationship between BNS and BMP incorporated the clearing rules for BMP’s
benefit. The trial judge based this conclusion on his analysis of clauses 4.1,
4.3, 4.4 (para. 296) and 4.7 (para. 297), as well as on the testimony of the
branch manager, who stated: “[The service agreement] uses — That’s correct. It
used the clearing settlement system” (para. 291). This statement supports the
fact that BNS “used” the clearing system. However, it does not mean that the
rules were incorporated into the service agreement. Clauses 4.1, 4.3 and 4.4,
to which the trial judge referred, read as follows:
4.1 You
are responsible for settling payment of your instructions. Unless you have made
specific arrangements with us, you will ensure that your accounts have
sufficient cleared funds to settle any instructions at the time that you give
us an instruction. We are not required to settle an instruction if sufficient
cleared funds are not available in your account. The reported balances for your
account may include amounts which are not cleared funds. Cleared funds means
cash or any funds from any deposit which have been finally settled through the
clearing system.
4.3 You
acknowledge that we must clear instructions using a clearing system and are
bound by the rules of any clearing system we use, including rules for
endorsement of instructions, identity of payee and the time for final
settlement. These rules affect our ability to honour your request to cancel
instructions and the procedures we must follow to settle your instructions and
clear funds for you.
4.4 We reserve the right to clear and transfer instructions by
whatever method we choose, whether they are drawn on your account or negotiated
by you. You grant us sufficient time to settle all instructions. You
acknowledge that we may delay crediting your account until we receive the
cleared funds for the instruction.
[59] Clause
4.1 is a restatement of the bank’s common law obligation to honour its
customer’s cheques and instructions when the customer has sufficient credit.
Under clause 4.3, BMP acknowledged that BNS was bound by the clearing rules. The
only consequence of this acknowledgment was that BMP would be precluded from
claiming a breach of the agreement if a failure by BNS to honour its
instructions was justified by the clearing rules BNS must abide by in dealing
with other banks. Clause 4.4 essentially gave BNS three types of rights: (1)
to clear instructions in whatever way it chose; (2) to take sufficient time to
settle instructions; and (3) to take sufficient time to credit the account.
Clause 4.4 was silent as to whether the “credit” ever became a final and
irreversible credit to BMP’s account. It may be that the restraint of the
funds by BNS was based on no express provision, but it is clear that the
clearing rules were neither expressly nor implicitly incorporated for BMP’s
benefit.
[60] In
summary, the trial judge could not rely on the clearing rules to arrive at the
conclusion that BMP had a right to the proceeds of the forged cheque.
Consequently, I find that the first answer at the second step of the Simms
test is that RBC did not intend and is not deemed in law to have intended that
BMP receive the funds. Two other enquiries remain: whether consideration was
given and whether a change of position occurred.
4.2.2.2 Consideration
[61] The
question whether BMP has given consideration is easily answered in light of the
trial judge’s finding of fact that BMP gave no value for the instrument. At
the same time, BMP’s position that RBC should bear the loss entails an implicit
acknowledgment that neither itself nor BNS has given consideration for the
instrument.
4.2.2.3 Change of Position
[62] The
question in the third enquiry is whether the payee has changed its position.
In Simms, the condition that money cannot be recovered in the event of a
change of position was seen to be linked to the defendant’s being deprived of
an opportunity to give a notice of dishonour. This prompted comments that the
defence of change of position is more specific than the label would suggest:
Geva, “Reflections”, at pp. 308 ff. However, leading English commentators on
the subject now observe that the law has evolved and may now include defences
of change of position that are not related to the BEA ’s notice
requirements: Lord Goff and G. Jones, The Law of Restitution (6th ed.
2002), at p. 852; see Lipkin Gorman v. Karpnale Ltd. Similarly, leading
Canadian commentators consider that since Rural Municipality of Storthoaks
v. Mobil Oil Canada, Ltd., [1976] 2 S.C.R. 147, the defence of change of
position has been “an established feature of the Canadian law of mistaken
payments”: Maddaugh and McCamus, at p. 10-35, §10:500.10; see also G. H. L.
Fridman, Restitution (2nd ed. 1992), at p. 458. I see no reason why the
general defence of change of position should not apply to mistaken payments
made on forged cheques.
[63] To
conduct the change of position enquiry, it is necessary to determine whether
the payee parted with the funds. In this case, BNS, as the collecting bank,
received the funds from RBC for the benefit of the payee, BMP, and credited
BMP’s account. 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. It is
settled law that a customer is a creditor of the bank when he or she deposits
funds into an account and that the bank holds these funds as its own until the
customer asks for repayment. This principle has gone unquestioned since Foley
v. Hill (1848), 2 H.L.C. 28, 9 E.R. 1002. See Crawford and
Falconbridge: Banking and Bills of Exchange (8th ed. 1986), vol. 1,
at pp. 742‑43; Ogilvie, at p. 179.
[64] Thus,
although BNS’s role was changed from that of a collecting bank to that of a
borrower, for the purposes of the change of position analysis, it must be
concluded that BNS remained the holder of the funds. Moreover, at the time
they were restrained, the funds now claimed by BMP were still credited to its
account. Therefore neither BNS as the holder of the funds nor the payee had
changed its position.
[65] In
conclusion, BMP had not changed its position and the defence was available
neither to it nor to BNS. It is worth noting that cases in which a person who
is not a party to the fraud has neither given consideration nor changed its
position will be rare. However, that is what has happened here according to
the facts found by the trial judge. In these circumstances, all the conditions
for recovery of the payment made by mistake are met. Other objections have
been made, though, and I will discuss them now.
4.3 Jus Tertii Defence, Self-Help Arguments and
Policy Considerations
[66] The
trial judge found that it was wrong for BNS to transfer the funds to RBC. He
was of the view that BNS had favoured a bank to its customer’s detriment. In
his opinion, BNS was not entitled to exercise any of the rights that could have
been exercised by RBC.
[67] The jus
tertii argument the trial judge relied on could be accepted only if RBC had
no right to recover the funds from BNS. Only then could BNS be said to have
acted in RBC’s stead. Since I have concluded that 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. This is the result of the application of
the law to the highly singular facts of this case.
[68] It is
worth recalling some of the extremely unusual circumstances of this case: the
sale price of the unlicensed distributorship was arrived at by “pulling the
number out of the air”, the cheque was received without a cover letter, the
names of the sender and the drawer of the cheque were unknown, Newman, the
purchaser, could not be reached and the payee had given no consideration. The
fraud could not be clearer, nor could the origin of the funds. In my view,
since the rightful owner had a legitimate claim against the recipient, BNS had
no duty to give preference to BMP.
[69] The
funds received by BNS were RBC’s own funds and RBC had no right to be repaid
out of First National’s account. BNS acted in a way that could have enabled
the parties to avoid going through a series of judicial proceedings. This Court’s
reasoning in Bank Canadian National v. Gingras, [1977] 2 S.C.R. 554, at
p. 564, applies with equal force here. BNS asked BMP for support in recovering
the proceeds of the forged cheque. BMP insisted on retaining the funds even
though it had given no consideration for them and even though the fraud was
beyond dispute. In this case, BNS’s actions entailed no risk of curtailing the
protection from which a holder in due course is entitled to benefit.
[70] Furthermore,
BMP objected to the joinder of the action RBC had eventually instituted against
BMP, which was pending at the time this case was heard. It might have been
easier for the trial judge to assess the parties’ rights had the two
proceedings been joined. In these circumstances, the argument that BNS had
exercised a third party right or resorted to a self-help remedy not only sounds
hollow and opportunistic, but is procedurally unfounded.
[71] I can
conceive of no policy consideration that would preclude BNS from responding to
RBC’s common law right in this case. As I mentioned above, neither Price v.
Neal nor Bank of Montreal v. The King stands for a strict rule that
the drawee must in all circumstances bear a loss resulting from a cheque
bearing a forged signature of the drawer. There is no rule preventing RBC or
BNS from arguing that the payment to BMP was made by mistake. The commentators
find no convincing reason to establish an absolute rule against relief in the
case of payment on the drawer’s forged signature (B. Geva, “Conversion of
Unissued Cheques and the Fictitious or Non-Existing Payee — Boma v. CIBC”
(1997), 28 Can. Bus. L.J. 177, at p. 189; Scott, “Comment on
Reflections”, at p. 342).
[72] At
common law, the principle of finality of payment must be balanced against the
right of the owner of the funds to recover money paid under a mistake of fact.
The common law affords a defence to an innocent party who has given
consideration or changed his or her position. However, the person who is still
in possession of the funds is in the best position to stop the fraud. To
preclude means to prevent the continuation of a fraud in order to allow a
fraudulent payment to be finalized would be a strange policy. Thus, there is
no overarching policy consideration that would bar the payee’s bank from resisting
a claim based on a signature that has been proven to be forged where the payee
has not used the funds and has neither given consideration for them nor changed
his or her position.
[73] The
trial judge was of the view that BMP and the holders of the related accounts
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). In my view, BNS was entitled to object
that since the cheque was forged, the funds could be and were returned to their
rightful owner. The deposit of the forged instrument could not result in a
debt to BMP in this case. Therefore, BMP did not lose anything because the
funds had to be returned to RBC. The trial judge’s conclusion that BMP had
lost the right to demand payment of a debt owed by BNS is erroneous, because
the credit entry in the account had been made by mistake.
[74] I have
found that RBC made a mistaken payment, that nothing precluded it from
recovering the funds and that BMP had no defence to the claim. More
particularly, BNS was entitled not to raise a defence based on s. 165(3) BEA .
RBC, in trying to trace the sums it had mistakenly paid, was informed that a
portion amounting to over $776,000 was being held by BNS at the time the fraud
was discovered. An amount of $350,188.65 was still in BMP’s account. BNS also
restrained funds in the related accounts. The question the Court must now
answer is whether the rules of evidence are a bar to restitution. I will now
discuss this issue.
4.4 Right to Claim the Amounts in BMP’s Account
and to Trace Funds in the Related Accounts
[75] Tracing
is an identification process. The common law rule is that the claimant must
demonstrate that the assets being sought in the hands of the recipient are
either the very assets in which the claimant asserts a proprietary right or a
substitute for them.
[76] In the
instant case, RBC’s funds were first transferred through the clearing system to
BNS in its capacity as collecting bank — and thus as agent — for BMP. BNS then
made the entry in BMP’s account to reflect the receipt of the funds from RBC.
Finally, BMP made withdrawals from its account by way of transfers or cheques
for deposit in the related accounts and, in the case of the transactions
involving the $300,000 cheque, back to its own account. What is at issue here
is a non-specific fund.
[77] Under
ordinary circumstances, an agent cannot be sued in the principal’s stead.
However, as stated by Lord Goff and Jones in The Law of Restitution, at
p. 847, citing British American Continental Bank v. British Bank for Foreign
Trade, [1926] 1 K.B. 328 (C.A.),
where the agent has paid the money over to his principal but has received
it back again so that his position is as it was before he paid it over, he must
make restitution.
Save for the
$100 added to the bank draft, there is no issue of identification of the money
in BMP’s account. The unchallenged evidence is 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.
Therefore, BNS has a valid defence against BMP (see Bavins, Junr. & Sims
v. London and South Western Bank, Ltd., [1900] 1 Q.B. 270 (C.A.)). BNS’s
status with respect to the funds in the related accounts is different. BNS was
not acting as agent of the holders of the related accounts. A review of the
rules on tracing will therefore be helpful.
[78] It has
been accepted that the English case of Agip (Africa) Ltd. v. Jackson,
[1992] 4 All E.R. 451 (C.A.) (aff’g [1992] 4 All E.R. 385 (Ch.)), has been
accepted as setting out rules with respect to tracing of money: Citadel
General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805.
[79] According
to the Court of Appeal in Agip, tracing at law is permitted where a
person has received money rightfully claimed by the claimant. Liability is
based on mere receipt, and the extent of liability will depend on the amount
received (Agip (C.A.), at pp. 463‑64; Agip (Ch.), at p.
399; Banque Belge pour l’Étranger v. Hambrouck, [1921] 1 K.B. 321
(C.A.)). It is sometimes said that funds cannot be traced to bank accounts at
common law. This view overstates the rule and fails to take into account the
fact that, as an evidentiary process, tracing is possible if identification is
possible (see D. R. Klinck, “‘Two Distincts, Division None’: Tracing Money into
(and out of) Mixed Accounts” (1988), 2 B.F.L.R. 147, at p. 148, and L.
D. Smith, The Law of Tracing (1997), at pp. 183 ff.). Indeed, no statement
that tracing is impossible can be found in the case that is most often cited in
support of the theory that funds cannot be traced to bank accounts at common
law. If Lord Ellenborough C.J.’s comment in Taylor v. Plumer (1815), 3
M. & S. 562, 34 E.R. 721, is read in its entirety, it is clear that tracing
is impossible only when the means of ascertainment fail:
It makes no difference in reason or law into what other form,
different from the original, the change may have been made, whether it be into
that of promissory notes for the security of the money which was produced
by the sale of the goods of the principal, as in Scott v. Surman,
Willes, 400, or into other merchandize, as in Whitecomb v. Jacob, Salk.
160, for the product of or substitute for the original thing still follows the
nature of the thing itself, as long as it can be ascertained to be such, and the
right only ceases when the means of ascertainment fail, which is the case
when the subject is turned into money, and mixed and confounded in a general
mass of the same description. The difficulty which arises in such a case is a difficulty
of fact and not of law, and the dictum that money has no ear‑mark
must be understood in the same way; i.e. as predicated only of an undivided and
undistinguishable mass of current money. [Emphasis added; p. 726.]
[80] That
it is possible at common law to trace money to bank accounts is illustrated by
the cases of Hambrouck and Agip. In Hambrouck, a man named
Hambrouck had fraudulently procured cheques drawn on the Banque Belge pour
l’Étranger. He endorsed the cheques and deposited them in his account at
Farrow’s Bank. The cheques were cleared through the banking system and credited
to Hambrouck’s account. “In substance no other funds were paid into the
account than the proceeds of these forged cheques” (Atkin L.J., at p. 331
(emphasis added)). Hambrouck then paid money out of that bank account to a
Ms. Spanoghe, with whom he was living. A deposit was made in Ms.
Spanoghe’s account at the London Joint City and Midland Bank and, according to
Atkin L.J., “[n]o other sums were at any time placed to that deposit account”
(p. 332). On the basis of those facts, Bankes and Atkin L.JJ. were both of the
opinion that the funds could be traced at common law to Ms. Spanoghe’s account
(pp. 328 and 335-36). Two points drawn from that case are important for our
purposes: neither the fact that a cheque is cleared through the banking system
before being deposited in the payee’s account nor the fact that the payee has
mixed the funds with other funds is sufficient to bar recovery at common law.
[81] To
fully understand the parallel between Hambrouck and Agip, it is
important to follow the sequence of events in the latter case. In Agip,
the Banque du Sud (“BdS”) in Tunis received a payment order of $518,822.92 in
favour of Baker Oil. BdS instructed Citibank to debit its account and credit an
account at Lloyds Bank. Lloyds Bank credited Baker Oil’s account before
receiving the funds from Citibank, thereby assuming the delivery risk. The next
day, pursuant to instructions from accountants Jackson & Co., who
controlled Baker Oil on behalf of their clients, Lloyds Bank transferred the
funds to Jackson & Co.’s account. At the time the credit was entered in
Baker Oil’s account, there was no other money in the account; however, the
balance of Jackson & Co.’s account was US$7,911.80 before the transfer. The
Court of Appeal agreed with the trial judge that the mixing of the funds with
the amount already in Jackson & Co.’s account was of no consequence and did
not preclude tracing (pp. 465‑66). In first instance, Millett J., as he
then was, had stated in Agip, at p. 399:
A fortiori it can be no defence for [Jackson, a partner of Jackson &
Co.] to show that he has so mixed it with his own money that he cannot tell
whether he still has it or not. Mixing by the defendant himself must,
therefore, be distinguished from mixing by a prior recipient. The former is
irrelevant, but the latter will destroy the claim for it will prevent proof
that the money received by the defendant was the money paid by the plaintiff.
[Emphasis added.]
[82] In Agip,
the time when the funds the plaintiff sought to trace ceased to be identifiable
was when Lloyds Bank made the transfer to Jackson & Co.’s account before
receiving the funds from Citibank: even though Lloyds Bank later recouped them,
the funds used to make the payment belonged to Lloyds, and BdS’s funds had to
be traced through the clearing system. On that issue, the Court of
Appeal also agreed with Millett J. and quoted him (at p. 466):
Unless Lloyds Bank’s correspondent bank in New York was also Citibank,
this involves tracing the money [BdS’s funds] through the accounts of Citibank
and Lloyd’s Bank’s correspondent bank with the Federal Reserve Bank, where it
must have been mixed with other money. The money with which Lloyds Bank was
reimbursed cannot therefore, without recourse to equity, be identified as being
that of the Banque du Sud.
[83] What
distinguishes Agip from Hambrouck is that Lloyds Bank, having
assumed the delivery risk, paid with its own money. This broke the link
between the funds it paid and the funds it received from Citibank. If passage
through the clearing system could on its own eliminate any possibility of
identifying the money, tracing at common law would long ago have become totally
obsolete and the dictum of the Court of Appeal in Agip that mixing in
Jackson & Co.’s account was of no consequence would be of little use. I
cannot accept that the result in Hambrouck can be explained by an
oversight that occurred because the interruption caused by passage through the
clearing system was not argued: P. J. Millett, “Tracing the Proceeds of Fraud”
(1991), 107 L.Q. Rev. 71, at p. 74, fn. 7. When, as in Agip, 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 should be a neutral factor: P. Birks, “Overview: Tracing,
Claiming and Defences”, in P. Birks, ed., Laundering and Tracing (2003),
289, at pp. 302-5. Indeed, I prefer to assess the traceability of the asset
after the clearing process and not see that process as a systematic break in
the chain of possession of the funds. Just as the collecting bank receives the
funds as the payee’s agent, the clearing system is only a payment process.
Paying through the clearing system amounts to no more than channelling the
funds.
[84] In Hambrouck,
the funds received through the clearing system by Farrow’s Bank, acting as the
collecting bank, from the Banque Belge pour l’Étranger had not lost their
“identity”. In the same way, the funds in the case at bar have not lost
theirs. BNS, acting as the collecting bank, received the funds from RBC
through the clearing system and credited them to BMP. The asset traced by RBC
is simply its own. It is not the chose in action or the account holders’s
personal claim against BNS: R. M. Goode, “The Right to Trace and its Impact in
Commercial Transactions — I” (1976), 92 L.Q. Rev. 360, at p. 380. The
transactions that followed were all conducted by the recipient and persons
related to it who received the money from BMP. Moreover, the fact that some of
the accounts had prior balances is not a bar to recovery. Not only were the
balances not substantial — only one of the accounts contained over $100 —
but the withdrawals by the holders significantly exceeded the balances. It is
also worth noting that BNS was both the drawee and the payees’ banker in all
the transactions at issue, namely the transfers and payments from BMP’s account
and to the related accounts. There was no hiatus like the one in Agip,
and the holders of the related accounts were not third parties who had given
consideration or changed their positions.
[85] In my
view, Taylor, Agip and Hambrouck show that it is possible
at common law to trace funds into bank accounts if it is possible to identify
the funds. (See also Goode, at pp. 378, 390-91 and 395.) According to Agip
and Hambrouck, mixing by the recipient is not a bar to recovery. I do
not see those cases as exceptions to a common law rule against tracing in mixed
funds. Rather, I accept the view advanced by Lord Millett in Foskett v.
McKeown, [2001] 1 A.C. 102 (H.L.), at p. 132, that the rules for
tracing money are the same as those for tracing into physical mixtures. This
view is also supported by Professor L. D. Smith in his treatise The Law of
Tracing, at pp. 74 and 194 ff. For our purposes, there is no need to review
all the rules applicable to physical mixtures (Lawrie v. Rathbun (1876),
38 U.C.Q.B. 255; Carter v. Long & Bisby (1896), 26 S.C.R. 430, at
pp. 434-35; J. Ulph, “Retaining Proprietary Rights at Common Law Through
Mixtures and Changes”, [2001] L.M.C.L.Q. 449). Suffice it to say that,
as between innocent contributors, contributions are followed first to amounts
they have withdrawn. In the case at bar, since the withdrawals of all those
who received funds far exceeded their contributions, RBC can trace its own
contribution to the balances remaining in the accounts.
[86] As
Atkin L.J. mentioned in Hambrouck, the question to be asked is whether
the money deposited in those accounts was “the product of, or substitute for,
the original thing” (p. 335). In the instant case, the identification process
is quite simple. I will not go back over the issue of the funds in BMP’s
account: there was no relevant movement of funds. Regarding the funds in the
related accounts when BNS acted on BMP’s instructions and transferred money to
the accounts of 636651 B.C. Ltd., Backman (chequing and savings accounts) and
Hashka, the transferred funds were clearly related to the forged cheque BNS had
mistakenly credited to BMP’s account. The moneys used for the transfers came
from BMP’s account. The link is made with the funds RBC had used to pay the
forged cheque.
[87] One
issue that was raised is whether certification of the cheques would be a bar to
tracing. When a cheque is certified, the certification does not affect the
nature of the funds. In discussing the effect of certification in Rattray
Publications, at p. 505, Finlayson J.A. stated that certification of a
cheque, like acceptance, is irrevocable; see also Centrac Inc. v. Canadian
Imperial Bank of Commerce (1994), 21 O.R. (3d) 161 (C.A.). As a matter of
law, to hold that certification is irrevocable would contribute to the
acceptability of certified cheques as substitutes for cash and would also
reflect the prevailing perception in the business world that it is irrevocable.
However, BNS’s intention in the instant case was not to revoke the
certification. In fact, the certified cheques had already been honoured. As
Maddaugh and McCamus point out:
The fact that the drawee bank cannot resist payment on a cheque it has
certified does not necessarily insulate the payee, however, from a subsequent
restitutionary claim by the paying bank. [p. 10-57]
[88] In Rattray
Publications, Finlayson J.A. stated that “where a drawee bank honours a
cheque notwithstanding a valid countermand and the effect is to satisfy a just
debt, the bank may [debit the customer’s account and] successfully defend an
action by [the] customer/drawer for reimbursement” (p. 509). Further, where a
payment does not satisfy a just debt, the bank “may have an action in
restitution against the holder of a certified cheque” (ibid.). Indeed,
if a bank has certified a cheque, it cannot deny the authenticity of the
drawer’s signature and the sufficiency of the funds. However, certification
does not affect the traceability of the underlying funds.
[89] What
remains to be discussed is the claim by way of cross‑appeal concerning
punitive damages.
4.5 Damages
[90] The
Court of Appeal found that BNS had breached the service agreement by reversing
the credit in BMP’s account without having been instructed to do so by BMP.
However, it also found that BMP had suffered no real injury and accordingly
awarded nominal damages of $1. In addition, it ordered BNS to pay BMP the
difference of $100 between the bank draft of November 7, 2001, and the
certified cheque of November 2, 2001. BNS does not contest this conclusion. BMP
seeks an increase in the damages and Hashka, Backman and 636651 B.C. Ltd. seek
an order for damages.
[91] In
light of my conclusion that BNS could resist BMP’s claim on the basis of the
doctrine of mistake of fact, it is my view that no additional damages can be
awarded. Since RBC could trace the funds with the assistance of BNS, the same
reasoning applies to the restraint of funds and the reversal of credits.
Therefore, the claim to have the trial judge’s award restored fails.
[92] BMP
also seeks an award of punitive damages. The trial judge rejected this claim,
finding that BNS’s conduct did not warrant such an award. In view of my
conclusions on BNS’s right, this claim, too, can only fail.
5. Conclusion
[93] Beyond
the strangeness of its factual substratum, this case involves an application of
the well-established doctrine of mistake of fact to very unusual facts. The
business of collecting banks will rarely lend itself to the application of this
doctrine because most of the time, the bank will have changed its position, or
its customer will have drawn on the credited amount, or the funds will have
been mixed in a way that precludes tracing. In this case, however, the
application of common law principles leads to a logical conclusion. The Court
of Appeal found support for that conclusion in equity and it may be that
support can be found there, but the same result can be obtained at common law.
[94] The
appeal should be dismissed with costs and the Court of Appeal order affirmed.
The cross-appeal should be allowed with costs and the awards of damages in
favour of 636651 B.C. Ltd., Hashka and Backman set aside, save for the amount
of $13.50 payable to Backman, which BNS does not contest.
Appeal dismissed with costs and cross‑appeal allowed with costs.
Solicitor for the appellant and the respondents on
cross-appeal: Paul E. Jaffe, Vancouver.
Solicitors for the respondent/appellant on cross-appeal: Fasken
Martineau DuMoulin, Vancouver.