In Teva Canada Ltd. v. TD Canada Trust, Teva Canada Ltd. (“Teva”), a pharmaceutical company, “was the victim of a fraudulent cheque scheme implemented by one of its employees”, (para 1). Teva claimed the collecting banks were liable for the tort of conversion. Teva Canada Ltd. v. TD Canada Trust provides insight into the Bills of Exchange Act‘s (“BEA”) section 20(5) defence to the tort of conversion, by clarifying the approach used to determining whether a payee is “fictitious or non-existing”. In the event that a payee is deemed fictitious or non-existing within the meaning of section 20(5) of the BEA, the bill may be treated as payable to the bearer, and thus can be negotiated by simple “delivery” to the bank meaning endorsement is not required, and the defence will succeed (para 5).
Justice Abella, writing for the majority, outlined the two-step framework a bank must satisfy to demonstrate that a payee is fictitious or non-existing (para 7).
- Subjective Fictitious Payee Inquiry – asks whether the drawer intends to pay the payee.
- If the bank proves the drawer lacked such intent, then the payee is fictitious, and the drawer is liable.
- If the bank does not prove the drawer lacks such an intent, then the payee is not fictitious, and the analysis proceeds to step 2.
- Objective Non-Existing Payee Inquiry – asks if the payee is either (1) a legitimate payee of the drawer; or (2) a payee who could reasonably be mistaken for a legitimate payee of the drawer.
- If neither (1) or (2) is satisfied, then the payee does not exist, and the drawer is liable.
- If either (1) or (2) is satisfied, then the payee exists, and the bank is liable.
In this case, none of the payees were fictitious or non-existing, and thus the defence in section 20(5) did not apply – the banks were liable for conversion.
Interestingly, the Court split 5-4, and the real divide seemed to come down to underlying policy considerations. The majority focused on which innocent party – Teva or the banks – “should bear the loss occasioned by fraud” (para 69), since the fraudulent behaviour was not committed by either of the parties to this litigation. They concluded that their decision to have the bank bear the loss strikes the appropriate balance in maintaining efficiency and efficacy of the bills of exchange system (para 18). The majority adhered to precedent to ensure “certainty, consistency, and institutional legitimacy” (para 65), recognized that banks are well-situated to bear “the losses arising from fraudulent cheques” through distribution (rather than potentially bankrupting individuals or small businesses), and highlighted that banks are more significant beneficiaries of the bills of exchange system (para 67).
On the other hand, the dissent, written by Justices Coté and Rowe, opted for the replacement the of subjective elements of the section 20(5) BEA defence with more simplified objective elements in order to support “negotiability, certainty, and finality of payment” (para 82), and more fairly and effectively allocate risk to the party in “the best position to detect and minimize fraud”, which they argue is the drawer (para 128). In support of their position, the dissent also highlighted the role of fraud insurance in transferring the risk to an insurance company to absorb losses (para 134).
While the majority focused on the pragmatic consequences through a social welfare lens, the dissent focused on prevention and fault through a rights-based lens. Teva Canada Ltd. v. TD Canada Trust captures the competing underlying values and policy considerations that arise in the context of claims related to fraud and the bills of exchange system. The majority’s position outlined by Justice Abella is far more business-friendly than the dissent’s by having a narrower scope for the section 20(5) BEA defence to the tort of conversion, meaning that businesses that have been the victim of fraud may be able to ensure banks rather than their business bears the losses.
If you require legal advice regarding Bills of Exchange and banking law, please contact Gilbertson Davis LLP for an initial consultation.