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Banking (international).

Although Canadian Bills of Exchange Act generally invalidates checks bearing forged endorsements, supreme court of Canada applies common law doctrine of mistake of fact to payments on forged check as between two Canadian banks where honoring check rested on said mistake

The Plaintiffs, Audie Hashka (AH) and Paul Backman (PB), owned interests in BMP Global Distribution Inc. (BMP) The Plaintiffs had a meeting with Sunn Newman (SN) in the United States. SN was allegedly associated with a concern called Sunrise Marketing(SM), a company operating in British Columbia that distributed non-stick bakeware without any formal license or written agreement with its supplier. Eventually, upon oral agreement by long distance telephone from the U.S. to Canada, SN offered to buy the rights to distribute BMP's bakeware in the United States for US$1.2 million.

AH next went to a Bank of Nova Scotia (BNS) branch , where BMP held an account. There he deposited an unendorsed check for C$904,563 that was payable to BMP and drawn on the account of a corporation at the Royal Bank of Canada (RBC). This bank initially put a hold on the funds; but it ultimately released and paid them out . The check later turned out to be counterfeit, all endorsers' signatures having been forged. The BNS then froze the Plaintiffs' bank accounts and executed a charge back in favor of RBC .

The Plaintiffs next sued for the recovered amount, alleging that BNS had breached their banking contracts. The trial judge ordered BNS to pay the Plaintiffs the total of the amounts debited or $777,336.04 in damages. BNS successfully appealed the trial judge's decision and the Plaintiffs unsuccessfully cross-appealed, seeking punitive damages.

The Plaintiffs further appealed to the Supreme Court of Canada and the Defendants cross-appealed on the issue related to tracing the amounts in the Plaintiffs' bank accounts. In a scholarly opinion, the Court dismisses the appeal and the cross-appeal. In sum, the Court boils this case down as dealing with the restitution of amounts paid by RBC under a mistake of fact.

"The test laid down [by the English case law] for recovering money paid under a mistake of fact is straightforward. 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. His claim may however fail if: (a) the payor 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."

"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."

"On the first step of the [English] 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 [section] 48(1) of the Bills of Exchange Act, (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." [[section][section] 22-24].

"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 check 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."

"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.... 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."

"... [W]hether the payor is deemed in law to intend that the payee keep the money [however] 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 check 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." [[section][section] 26-28].

"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." [[section] 35].

"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 (HIDCs) and therefore entitled to rely on [section] 128(a) BEA."

"It is another requirement for qualifying as an [HIDC] under [section] 55(1)(b) BEA that is lacking here: BMP did not take the instrument for value, so it was not an [HIDC]. Since only an HIDC can benefit from [section] 128(a) BEA, even if RBC were deemed-by payment--to have accepted the forged check, it would not be precluded from denying to BMP the genuineness of the drawer's signatures."

"The other provision that is relevant to RBC's right to recover the money it paid by mistake from BNS is [section] 165(3) BEA. [It provides that: 'Where a check is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the check, the bank acquires all the rights and powers of an HIDC] of the check.'"

"According to [BEA, [section] 165(3)], BNS acquired the status of an [HIDC] by receiving the check from the payee and crediting the amount to the payee's account. 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.

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 [section] 165(3) BEA, but whether it could restore the funds to RBC." [[section][section] 38-41]

"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 an [HIDC] 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 [section] 165(3) BEA." [[section] 45].

"Today, most bank account agreements, including the Service Agreement between BMP and BNS, are standard form contracts. However, terms may still be implied: [Cites]. 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." [[section] 48].

"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 [of the Service Agreement] 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." [[section] 50].

"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'. The [Service] 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." [[section][section] 52-53]

"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 check. Consequently, I find 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."

"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."

"The question in the third enquiry is whether the payee has changed its position. 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."

"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."

"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." [[section][section] 60-65].

"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."

"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 check was received without a cover letter; the names of the sender and the drawer of the check were unknown; SN, 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." [[section][section] 67-68].

"I can conceive of no policy consideration that would preclude BNS from responding to RBC's common law right in this case.... 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 ... [Cites]."

"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. The person who is still in possession of the funds, however, 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."

"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. In my view, BNS was entitled to object that, since the check 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."

"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 [section] 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." [[section][section] 71-74].

"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 appeal should be dismissed with costs and the Court of Appeal order affirmed." [[section][section] 93-94].

CITATION: B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 Carswell B.C. 809; 2009 S.C.C. 15 (Can. Sup. Ct. 2009).
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Publication:International Law Update
Geographic Code:1CANA
Date:Oct 1, 2009
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