In a unanimous decision by the Ontario Court of Appeal greater clarity has emerged as to the available defences for banks under the Bills of Exchange Act, R.S.C. 1985 c. B.4 (“BEA”) with respect to employee cheque fraud.
Teva Canada Limited v. Bank of Montreal, 2016 ONCA 94 involved a former finance department employee of Teva Canada Limited (“Teva”) who requisitioned numerous cheques over three (3) years, from various bank accounts at several banks (the “Banks”), which amounted to over five (5) million dollars in transfers. The former employee was not authorized to make such requisitions but managed to deposit the fraudulent cheques in part because of a failing on the part of Teva’s accounts payable department. The department, with the knowledge that the former employee had no authorization, issued the cheques, contrary to their internal policies.
After the fraud was discovered in 2006 and the former employee was terminated, Teva brought an action for tortious conversion against the Banks. Despite the Banks being innocent parties to the fraud, Teva argued that the former employee and accomplices were not “were lawfully entitled to the cheques, the banks were prima facie liable to Teva for converting them.” (para 4) The Banks put forth two defences under the BEA and another under the Limitations Act 2002, S.O. 2002, c. 24, Sch. B. Both Teva and the Banks brought motions for summary judgement. The motion judge rejected the Banks’ defences and granted Teva judgement in an amount exceeding 5.4 million dollars.
The Banks then made an appeal on the grounds that the motion judge erred in giving proper considerations to the Banks’ defences of Teva’s claim and that the motion judge’s reasons for summary judgement were inadequate.
THE ONTARIO COURT OF APPEAL’S DECISION
The central issue in consideration on appeal was whether the loss incurred from an employee’s fraud against its innocent employer by misappropriation of cheques is borne by the employer or the bank who allows the transfer.
The Court discussed the principles of the tort of conversion. Specifically, the Supreme Court of Canada in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce,  3 S.C.R. 727 (“Boma”), confirmed that a bank has strict liability with respect to the tort of conversion when a bank pays the value of a fraudulent cheque to someone who is not entitled to possess it. The Court noted that the majority in Boma found when “the banks committed these wrongful acts, as they did, innocently and in good faith, affords them no defence.” (para 26).
However, the Court found that “the tort of conversion is a strict liability tort, it is not an absolute liability tort.” (para 29). What’s more under s. 20(5) of the BEA, there is an available defence to a tortious action of conversion where a payee is “fictitious” or a “non-existing person”. In determining the scope of s. 20(5) the Court held that names that were similar or even identical to existing customers could fit within the meaning of “fictitious” or “non-existing person.”
The Court further outlined a difference between “fictitious” and “non-existing person.” A “non-existing person” is a question of fact, where as a “fictitious” payee is determined from the intention of the drawer. Teva, as the drawer, failed to show that they intended to pay the named payee. Teva could not have made the necessary honest but mistaken belief that the named payees were real customers because “[n]o one in a position of authority ever looked at any of the requisitions or the cheques.” (para 53). Specifically, Teva issued the cheques mechanically with no internal approvals and thus could not form any necessary intent to negate the availability of a s. 20(5) defence. The motion judge failed to make a finding with respect to Teva’s intent. Therefore, the Court set aside the summary judgement and held that s. 20(5) of the BEA provides a defence to the Banks in these circumstances. As such, Teva’s conversion action was dismissed.
This decision follows the Ontario Court of Appeal’s previous decisions that loss or risk of loss should rest with the part that is in the best position to prevent the fraud, in this case Teva. However, Teva has filed an application for leave to appeal to the Supreme Court of Canada. Until a decision is made with respect to the application, companies (employers) should consider implementing and enforcing cheque approval policies, which may shift the risk and increase the likelihood of a strict liability remedy against the banks.