Majority
The judgment of Abbott, Martland, Ritchie and Spence JJ. was delivered by
MARTLAND J.
MARTLAND J.—This is an appeal from the unanimous judgment of the Court of Appeal for British Columbia, which dismissed the appellant’s appeal from the trial judgment.
The appellant’s claim was made in respect of 73 forged cheques which, over a period of five years, had been paid out by the respondent, The Royal Bank of Canada, hereinafter referred to as “Royal”, and which had been debited to the appellant’s account with that bank. The total amount of these cheques was $165,109.03. Of these cheques, the forger, Seear, an employee of
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the appellant, had deposited with the respondent, Bank of Montreal, hereinafter referred to as “Montreal”, cheques in the total amount of $128,418.23, on which Montreal had collected that amount from Royal.
Seear, in 1963, had become chief accountant and office manager of the appellant. His practice was to use the appellant’s printed blank cheque forms, by filling in the name of a payee, or cash, and an amount. He would forge the signatures of the appellant’s officers authorized to sign its cheques. He cashed the cheques made payable to cash at the Royal. Some of the others were deposited with Montreal to the credit of certain trade names adopted by Seear. From time to time he withdrew the moneys in these accounts. It was not until May, 1968, that an audit revealed that the 73rd of the cheques above mentioned, in the amount of $9,077.14, was a forgery, and notice was then given to Royal.
In 1962, the appellant had entered into an agreement with Royal in the following terms:
In consideration of THE ROYAL BANK OF CANADA (hereinafter called the “Bank”) opening or continuing an account with the undersigned, the undersigned hereby agrees with the Bank in respect of each account with the undersigned now or hereafter kept by the Bank at any of its branches or agencies to verify the correctness of each statement of account received from the Bank and if a statement of account and relative vouchers are not received by the 10th day after the end of each month or, if statements are not to be prepared monthly, by the 10th day after the end of the term agreed on for their preparation to obtain them from the Bank and within 30 days after the time when they should have been received to notify the Bank in writing at the branch or agency where the account is kept of any alleged omissions from or debits wrongly made to or inaccurate entries in the account as so stated and that at the end of the said 30 days the account as Kept by the Bank shall be conclusive evidence without any further proof that except as to any alleged errors so notified and any payments made or forged or unauthorized endorsements the account contains all credits that should be contained therein and no debits that should not be contained there and all the entries therein are correct and subject to the
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above exception the Bank shall be free from all claims in respect of the account.
Dated at Vancouver , this 6th day
of August , 1962
ARROW TRANSFER CO. LTD. General A/C
(Sgd.) J.W. Charles (Sgd.) G.T. Campbell
The primary claim of the appellant against Royal was that it had paid out the total amount in question without authority from the appellant. Royal’s defence to this claim was based upon the agreement set out above, hereinafter referred to as the “verification agreement.” No notice to Royal had been given by the appellant within the time prescribed in the agreement in respect of any of the forged cheques, except only the last one. The appellant recovered judgment in the amount of that cheque, i.e., $9,077.14, but its action in respect of the remainder of its claim, i.e., $156,031.89, was dismissed.
The claim of the appellant against Montreal was for $128,418.23 as money had and received by it to the use of the appellant, or, alternatively, as damages for conversion of that amount. This claim was dismissed.
I agree with the opinions expressed in the Court of Appeal that the verification agreement provided Royal with a complete defence to the action. That agreement is a contract, defining the terms upon which the bank continued the account of the appellant. The appellant agreed to verify each statement of account which it received from the bank, and, within the period specified, to notify the bank of any debits wrongly made in the account. At the end of the stipulated period the account as kept by the bank became conclusive evidence that it contained no debits that should not be contained in it, subject to only two exceptions:
1. Errors of which timely notice had been given to the bank;
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2. Payments made on forged or unauthorized endorsements.
The debits entered in the appellant’s account in respect of the forged cheques paid by Royal were “debits wrongly made.” The payment was not made on a forged endorsement. Except as to the last of the 73 cheques, the appellant failed to give the required notice as to debits wrongly made. As to the first 72 cheques, the account became conclusive evidence that it contained no debits that it should not have contained, and Royal was freed from any claim in respect of them.
I do not agree with the contention that the words “debits wrongly made” do not apply in respect of a forged cheque. The obligation of the customer to give notice to the bank within the prescribed period relates to any debit wrongly made, and it is clear that it is wrong for a bank to debit a customer’s account in respect of the payment of a forged cheque. In the absence of the verification agreement, a bank which debited a customer’s account in respect of a forged cheque would be liable to him. The agreement furnishes some protection to the bank in that the customer must check the account and the relevant vouchers and give prompt notice if he is to enforce that liability against the bank. I see no reason to limit the meaning of the words “debits wrongly made.” They apply to any debit to the account which the bank was wrong in making.
There is the further fact that the verification agreement does refer to forgery, in relation to payments made on forged endorsements. Such payments are within one of the two exceptions to the conclusive nature of the account. The fact that a specific exception was created in respect of a forgery of that kind indicates that the agreement is applicable in respect of a debit wrongly made in relation to a cheque on which the signature of the drawer is forged.
I do not regard the decision of this Court in Stewart v. The Royal Bank of Canada and Fraser[2] as being contrary to my interpretation of the verification agreement in this case. That was a case
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in which a local bank manager of the defendant bank had taken, without authority, sums from a customer’s bank account. The main defence raised by the bank in an action to recover these sums was that they had been repaid. The bank did raise, as an additional defence, a document, signed by the customer, in the following form:
RECEIVED from THE ROYAL BANK OF CANADA, Middle Musquodoboit, N.S., statement of my/our account as at the close of business on April 29, 1922, showing a balance of $6,684.05 in my favour, together with vouchers for all amounts charged to the said account up to and including the said date.
For valuable consideration I/we agree to examine forthwith into the accuracy of the said statement and the regularity and validity of the said vouchers, and I/we further agree that at the expiration of ten days from the date hereof, the said statement shall be conclusive evidence of the correctness of the balance therein shown, and the bank shall be and is released from all claims by me/us in respect of any and every item shown in the said statement, save such as shall have been questioned or objected to in writing within the said ten days.
(Sgd.) T.E. STEWART.
It was held on the facts of this case that the bank was not protected from liability by this document. Duff J., as he then was, delivering the reasons of the majority of the Court, said:
It is first necessary to observe that the document is a receipt for vouchers, for vouchers for all amounts charged to the “said account” up to and including the “said date.” Now this is a receipt produced to the customer by the bank for signature, and there can be no possible doubt as to the meaning of the word voucher used in it; it is something in the nature of authority or some evidence or record of authority to the bank to dispose of the sums charged. Admittedly, there never was any such voucher in respect of these sums of $3,500 and $1,500; as to the sum of $3,500, there is a vague suggestion, but as evidence it is negligible. And here it must be insisted on, because it is vital, that the case has proceeded from the beginning to the end on the basis that neither the bank nor Fraser had authority to abstract these sums. Fraser’s story from the beginning was that he took the money and with it made personal loans to the
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Creamery Company. It is perfectly plain, therefore, that this document is founded upon a fundamental error and as against the deceased Stewart can have no evidentiary weight as to the state of the account. It is to be observed that the document as drawn by the bank, and presented by the bank to its customer, is one of those documents which, being in ambiguous form, can be no protection. Read without extraordinary care by a customer, relying not only on the honesty, but upon the reasonable care of his banker, he might very well receive from it the idea: here are vouchers for all the sums charged, examine them and see whether or not they are genuine and if we do not hear from you within ten days, we are to be at liberty to assume that the balance is correct. That, I think, in the circumstances, is the meaning a customer would probably attach to this piece of paper; and the customer’s signature is of no value whatever as evidence in favour of the bank or anyone else.
The verification agreement in question in the present case is not ambiguous. It is a contract under which the customer undertakes a duty to the bank to disclose within a limited period, among other things, debits wrongly made. In the present case, the appellant received the statements and the relevant vouchers. Having failed to perform his contractual duty, the agreement made the statements conclusive evidence against him.
In Rutherford v. The Royal Bank of Canada[3], in which Duff J. sat, a cheque had been honoured, which was signed by only one officer of a company, whereas the banking resolution required the signatures of two officers. Smith J., who delivered the judgment of the Court, said:
No objection to the payment by the bank of this cheque was ever made by the company. The vice-president and treasurer Gregg had full authority to sign the release on behalf of the company, and prima facie that document is binding on the company. No evidence was offered to displace the prima facie defence thus established, and it is therefore unnecessary to discuss here under what state of facts or circumstances a customer of the bank might be relieved from the ordinary effect of such a release.
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There has been one case in this Court dealing with the liability of a bank which had charged its customer’s account with the amounts of forged cheques; i.e., The Bank of Montreal v. The King[4]. The cheques had been forged by a clerk employed by the Government of Canada. Periodically, the cheques, after payment, were received by the Government and a receipt was given to the bank therefor, together with an acknowledgment of the correctness of the balance as shown by the bank’s statement. While the bank was held liable in that case, it does not, in my opinion, have any bearing in the present appeal. The essential distinction is that there was no contract on the part of the customer in that case to verify the statement of account, and to accept it as conclusive unless any errors were notified to the bank within a stipulated period. The bank relied on the signed acknowledgments, not on the basis of contract, but as creating an estoppel. The majority of the Court based their decision on the proposition that estoppel could not be invoked against the Crown.
Verification agreements have been held to apply in respect of debits made in respect of forged cheques in Columbia Graphophone Co. v. Union Bank of Canada[5]; Mackenzie v. Imperial Bank[6]; B. & G. Construction Ltd. v. Bank of Montreal[7]; and Syndicat des Camionneurs Artisans du Québec Métropolitain v. Banque Provinciale du Canada[8].
In my opinion the claim against Royal in respect of the first 72 cheques is completely answered by the verification agreement.
With respect to the claim against Montreal, I am in agreement with the reasons of Robertson J.A., in the Court of Appeal, and with the reasons of my brother Laskin in this Court. In so far as the claim is for moneys had and received, the moneys received by Montreal in respect of the forged cheques were not those of the appellant,
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but were paid to Montreal by Royal. Royal was not entitled to charge those moneys to the appellant’s account, and would have had to assume responsibility for their payment, save for the protection afforded to it by the verification agreement.
The claim for conversion has to be based upon the conversion of a valuable instrument of the appellant (Morison v. London County and Westminster Bank, Limited[9], at p. 365; Lloyds Bank v. The Chartered Bank of India, Australia and China[10], at p. 55). In this case, however, there was no conversion of the appellant’s cheques. There was a conversion by Seear of the blank cheque forms of the appellant, but the signature of the drawer was a forgery, and the cheques were not payable to the appellant. Montreal did not convert cheques of the appellant.
For the same reasons the alternative claim in conversion against Royal also fails.
For these reasons, as well as for the reasons delivered in the Court of Appeal, I would dismiss this appeal with costs.
LASKIN J.
LASKIN J.—In the five-year period between April 1963 and April 1968, the appellant’s chief accountant (who was also its office manager) defrauded his employer of $165,109.03. He forged the signatures of the appellant’s signing officers to 73 cheques drawn on its account at a certain branch of The Royal Bank of Canada. Some of the cheques were made out to cash, some to fictitious payees, and some (totalling $128,418.23) were made out in the names of two accounts which the forger opened at a branch of the Bank of Montreal. The forger, who made off with the money, was able to conceal his fraudulent activities despite regular semi‑annual audits of his employer’s books of account; and it was not until the audit of May 1968 that his chicanery was uncovered. He was convicted of forgery and sentenced to imprisonment.
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The question before this Court, as before the Courts of British Columbia where the proceedings herein originated, is whether the appellant or the two banks should bear the loss, of which $156,031.89 is claimed from the Royal Bank (which admitted liability for the seventy‑third cheque in the amount of $9,077.14) and $128,418.23 of which is claimed from the Bank of Montreal. Whatever issues there may be between the banks inter se, if they are liable, have been postponed pending determination of the appellant’s claims against them.
The appellant put forward three grounds of recovery in respect of its claim against the Royal Bank and three also in respect of its claim against the Bank of Montreal. Two grounds for money had and received and for conversion, were common. The third ground of recovery from the Royal Bank, the one argued first and at greatest length, was an alleged breach of contract in honouring the forged cheques without authority. The third ground taken against the Bank of Montreal was its alleged participation in a breach of fiduciary duty between the appellant and its faithless employee. I say at once that I can find no basis on which this third submission against the Bank of Montreal can be maintained.
Leaving for the time being the two common grounds urged against the respondent banks and turning to the first submission against the Royal Bank, I note that the judgments below proceeded on the footing that the chief obstacle to success by the appellant on its claim was a verification agreement which it entered into with the Royal Bank. Counsel who appeared for that bank in this Court also relied on that agreement as the main defence to the appellant’s contention that the bank must answer for the breach of contractual obligation to its customer in debiting its account without its authority.
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The verification agreement, which was executed before the forgeries began, reads as follows:
In consideration of THE ROYAL BANK OF CANADA (hereinafter called the “Bank”) opening or continuing an account with the undersigned, the undersigned hereby agrees with the Bank in respect of each account with the undersigned now or hereafter kept by the Bank at any of its branches or agencies to verify the correctness of each statement of account received from the Bank and if a statement of account and relative vouchers are not received by the 10th day after the end of each month or, if statements are not to be prepared monthly, by the 10th day after the end of the term agreed on for their preparation to obtain them from the Bank and within 30 days after the time when they should have been received to notify the Bank in writing at the branch or agency where the account is kept of any alleged omissions from or debits wrongly made to or inaccurate entries in the account as so stated and that at the end of the said 30 days the account as kept by the Bank shall be conclusive evidence without any further proof that except as to any alleged errors so notified and any payments made on forged or unauthorized endorsements the account contains all credits that should be contained therein and no debits that should not be contained therein and all the entries therein are correct and subject to the above exception the Bank shall be free from all claims in respect of the account.
What the customer agreed to was (1) to verify the correctness of each statement of account received from the bank; and (2) if a statement of account and related vouchers were not received from the bank by the 10th day after the end of each month or by the 10th day after the end of any longer term for their preparation as agreed upon, the customer was to obtain them from the bank; and (3) within 30 days after the time when they should have been received, he must notify the bank in writing of “any alleged omissions from or debits wrongly made to or inaccurate entries in the account as so stated”; and (4) except as to alleged errors so notified and as to payments made on forged or unauthorized endorsements, the customer’s account as kept by the bank was to be conclusive, at the end of the prescribed 30‑day period, as to its correctness,
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and the bank was to be free from all claims in respect thereto.
This agreement replaced an earlier practice under which the appellant signed a verification form only after it had picked up or had delivered to it a statement of account and related cheques or vouchers. This form also provided for a 30-day period within which the bank was to be notified of errors, omissions or irregularities on pain, save as to forged or unauthorized endorsements, of the appellant being conclusively bound by the statement thereafter. I do not find much profit in disputation on whether the verification agreement in issue here was simply part of the contractual arrangement between the parties thereto or whether it was an exemption provision in their contractual relations. What is plain is that the verification agreement does not embrace the whole of the contractual relationship of the parties; it focuses on a part of it, albeit an important part, and in so doing it modifies the liabilities of the bank to its customer that would otherwise arise out of the fact of their relationship. That relationship is itself, of course, founded upon agreement but there was no suggestion before this Court that, apart from the verification document, the agreement was anything more than the manifested willingness of the one party to open an account for the other at the latter’s request.
The issue, therefore, which the verification agreement raises is the extent to which it has modified liabilities of the bank which would have existed without it; and, particularly, whether it relieves the bank of liability to answer for the consequences of successfully executed forgeries of a customer’s signature as drawer of cheques against its account which the bank honours, where the customer does not give notice of such forgeries to the bank within the prescribed 30-day period. It is, of course, part of the bank’s case that if the verification agreement includes in its scope forgeries of the customer’s signature as drawer, there is no alleviation in the fact that the forgeries were not discovered nor reasonably discoverable within the said 30-day period.
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The Royal Bank invokes in its favour a line of cases beginning with Columbia Graphophone Co. v. Union Bank of Canada[11], where Middleton J. held that forgery of the drawer’s signature was within the coverage of a verification form which was given to the bank customer with each statement of his account and was to be signed and returned. That form, which replaced an earlier one that was simply an acknowledgment of the correctness of the account, was similar to the document involved here but it contained no exclusions (not even of forged endorsements) and was by its terms conclusive against the customer, except as to “improper charges or errors” pointed out in writing, within a prescribed 10-day period. There is the further distinction that the form in the Columbia Graphophone case did not purport to have continuing force, as does the verification agreement in the present case, but had to have the signed acknowledgment of the customer on a periodic basis as statements of account were submitted.
Middleton J. dealt with the effect of this periodic form in emphatic brevity; he said this (at p. 332):
I can see no reason why these acknowledgments and agreements should not bind the customer. They were intended to be real agreements and to define the relation between the parties and, I think, relieve the bank from all liability down to [the last date on which such a form was signed].
This pronouncement spawned progeny which, although not all arising out of similar situations, gave at least the cover of continuity, with but one exception, to its validity and to its apparently unlimited scope. I shall refer first to cases which did not involve forgery and then to those that did.
Union Bank of Canada v. Wood[12] was a different case from the one which came before Middleton J. The issue was whether the bank had failed to credit the customer’s account with
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various cheques, as alleged by the customer, or whether the customer had received cash for the cheques, as alleged by the bank. It was held that the monthly verification forms signed by the customer effectively disposed of the issue. There was no question of forgery involved.
Rutherford v. The Royal Bank of Canada[13] was a case where a cheque signed by an authorized signing officer of a company payable to himself or order was cashed by the bank which was unaware of a company resolution requiring two signing officers. A verification slip, covering the period in which the cheque was cashed, and amounting to a settlement statement and release, was signed by an authorized officer of the company. The reasons of the Supreme Court, delivered by Smith J., refusing relief to the trustee in bankruptcy of the company, concluded with this statement: “No evidence was offered to displace the prima facie defence thus established, and it is therefore unnecessary to discuss here under what state of facts or circumstances a customer of the bank might be relieved from the ordinary effect of such a release.”
About a year and a half earlier, the Supreme Court, in Stewart v. The Royal Bank of Canada and Fraser[14], dealt with a case in which a bank sought protection through a verification agreement against the wrongful act of one of its branch managers who, without authority, took money out of a customer’s account. There was an issue raised of restitution by the branch manager which was ultimately decided against the bank. The verification documents relied on by the bank referred to the statement of the customer’s account as of a specified date showing a stated balance “together with vouchers for all amounts charged to the said account up to and including the said date”. There were no vouchers for the sums wrongfully appropriated. In speaking for the Court majority (there was one dissent) on
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the significance of the verification documents, Duff J., as he then was, said this (at p. 549):
It is to be observed that the document as drawn by the bank, and presented by the bank to its customer, is one of those documents which, being in ambiguous form, can be no protection. Read without extraordinary care by a customer, relying not only on the honesty but upon the reasonable care of his banker, he might very well receive from it the idea: here are vouchers for all sums charged, examine them and see whether or not they are genuine, and if we do not hear from you within ten days, we are to be at liberty to assume that the balance is correct. That, I think, in the circumstances, is the meaning a customer would probably attach to this piece of paper; and the customer’s signature is of no value whatever as evidence in favour of the bank or anyone else.
There are three forgery cases which followed upon the Columbia Graphophone case, none of which reached this Court. Mackenzie v. Imperial Bank of Canada[15] involved payment by a bank on a forged endorsement, and it successfully resisted a claim by the drawer on the basis of a verification document and on the supporting pronouncement in the Columbia Graphophone case. There was no reference in the short account of the case to s.49(3) of the Bills of Exchange Act, R.S.C. 1952, c. 15, as amended, now R.S.C. 1970, c. B-5, which ex facie gives the drawer one year from the time he acquired notice of the forgery within which to claim against the drawee bank. I am aware of the doubt that exists whether s.49(3) does more than fix an outside limit of time, and hence the contention that within that limit a “contracting out” or other preclusive conduct of the customer may be set up: see Falconbridge, Banking and Bills of Exchange, 7th ed., 1969, by A.W. Rogers, at p. 567. Section 49(3) does not apply to forged signatures of drawers, and hence I need not pass on its effect in this case; but I do point out that the verification agreement in issue here contains an express ex-
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clusion of forged endorsements from its asserted conclusive effect.
B. & G. Construction Co. Ltd. v. Bank of Montreal[16] was a case like the present one where the drawer’s signature was forged by an employee. Three cheques were involved, drawn over a period of a month and one-half. Verification receipts covering this period were signed by the drawer-customer and the defendant bank relied on the “conclusively settled” clause of the documents which precluded the customer from challenging the statement of account if it did not point out in writing “improper charges or errors” within a stipulated 15-day period. Here too there was no express reference to forgery or fraud (and, indeed, no exclusions), but in the absence of the prescribed notice the vouchers as to debit items were to be taken as “genuine and properly chargeable” against the customer. Although the Court, a single judge, considered a defence of estoppel which appeared to him to be a good one, he founded himself on the Columbia Graphophone case and on the principle that the verification receipts were signed as part of the relationship of banker and customer.
The Quebec Court of Appeal in Syndicat des Camionneurs Artisans du Québec Métropolitain v. Banque Provinciale du Canada[17] came to a similar conclusion, reversing the trial judge, in a similar situation of forgery of the customer’s signature to thirteen cheques by an employee, where the verification agreement (which expressly excluded payments made on counterfeit or unauthorized endorsements) referred to “errors, irregularities or omissions”. The Court relied on the Rutherford case in which (to use the words of Montgomery J.A. of the Quebec Court of Appeal) “the validity of a similar contract was upheld”.
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In none of the cases that I have mentioned was there any discussion of the scope of the verification document, apart from its validity, save that in the Quebec case last mentioned there was the following observation (at p. 612):
Respondent further suggests that the contract does not apply in the case of a cheque bearing a forged signature. I find nothing in the language of the contract so to limit its operation. I note that in the case of Rutherford v. Royal Bank… one of the required signatures was completely omitted, and I see no reason to distinguish the case where a signature is forged rather than omitted.
I shall return to this issue later in these reasons, because I wish to consider at this point a judgment of this Court which was not mentioned in the Columbia Graphophone case, nor in any of the other cases cited, save the B. & G. Construction Co. case where it was stated that the judgment in question went off on its particular facts, involving as it did a claim by the Crown in right of Canada.
Bank of Montreal v. The King[18] dealt with a claim by the Crown in right of Canada, a customer of the appellant bank, to recover from the bank the amounts of cheques on which the drawer’s signature was forged by a departmental employee of the Government who was able, for a time, to conceal his forgeries. The account operated by the Government was a letter of credit account under which the bank made advances to the specified limit and submitted monthly statements according to which it received Government cheques by way of reimbursement. Nothing, in my opinion, turns on the form of the account. There is the relevant fact that the monthly statements were accompanied by a receipt form which when signed, as it was by a responsible Government official, acknowledged the correctness thereof. The fact that the forger was the person who reported on the correctness of the statement to the signing official would not, of course, militate against the bank.
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The effect of these statements as “settled accounts” was differently treated in the Courts that were seized of the case. Anglin J. at trial took the position on this point that because the Audit Act provided only for reimbursement of the bank “for advances under credits to cover the expenditures made and authorized”, this statutory method of settling accounts governed (see 10 O.L.R. 117 at p. 130). In the Ontario Court of Appeal, Maclaren J.A. dealt with the “settled account” argument, based on a contractual relation arising out of the signed receipts, as follows (see 11 O.L.R. 595, at p. 607):
Notwithstanding the ingenious argument of the defendant’s counsel on this point, I am utterly unable to see how, under the facts and circumstances of this case, the receipts given by the accountant can operate to prevent the plaintiff from correcting the mistakes that were made in them, or avail as a defence to this action, unless they are sufficient, in connection with the other facts to create an estoppel. To my mind it is either a question of estoppel or no valid defence at all. If the plaintiff is precluded from going behind the receipts, and shewing the real facts it must be only because he is estopped from doing so by the conduct of his officers and servants.
In this Court, Girouard J., with whom Maclennan J. agreed, disposed of the drawee bank’s appeal on the basis of what is now s.49(1) of the Bills of Exchange Act, namely, that a forged signature is wholly inoperative, unless the drawer whose signature is forged is precluded from so asserting; and examining this latter point, not in relation to any privileged position of the Crown, but as between mercantile men, he concluded that there was no estoppel and that the bank could not rely on the settlement receipts for this purpose.
Davies J. pointed out that the settlement receipts were first urged to establish an estoppel, which the Courts below held could not be raised against the Crown; but then it was urged by the bank that a contractual relation arose so as to
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bind the Crown as by a settled account. As to this Davies J. said the following (at p. 274):
Why the signature as to the correctness of these pass-book sheets should have a different effect from the signature of settlement to any ordinary account so as to prevent it being re-opened in case of the discovery of a mistake, I am at a loss to understand. The officer signing the account as correct was deceived into doing so by a clever forger. The same forger deceived the bank by the forged signatures. If the circumstances under which the accounts were acknowledged to the bank could be held to be an estoppel well and good. But the doctrine cannot be applied as against the Crown and outside of it I cannot find any contract settling the accounts as between the government and the bank and prohibiting their being re-opened in case of mistake.
The bank became the plaintiff’s debtor for the money had and received and, outside of estoppel, nothing but payment, accord and satisfaction or a release under seal would be an answer to plaintiff’s demand.
Idington J. likewise took the view that there was no contractual bar to the Crown seeking rectification of “such a clear mistake or series of mistakes as occurred in one or more of its subordinate officers assenting to a stated account and incidentally thereto in some instances assenting erroneously to the number of cheques alleged in the statement as correctly representing the number chargeable” (at p. 279); only estoppel could be considered as a defence if the action was between private persons.
Duff J. agreed with Moss C.J.O. in the Ontario Court of Appeal, and that judge, on the point under discussion, rejected the notion that there was any obligation resting upon a customer, arising out of the relationship of banker and customer, to examine the pass-book and returned cheques and vouchers and to make timely objection if it would contest the state of accounts as
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indicated by the bank; the preclusion of the customer was a matter of estoppel by conduct, and this could not be urged against the Crown. I am bound to say that Moss C.J.O. made no express reference to the signed receipts acknowledging the correctness of the account unless it be in his assertion that “a customer [is not precluded] from disputing debits which have appeared in the book both when delivered to him and returned by him without objection, or from denying the genuineness of his signature to cheques which represent such debits and have been returned paid with the book and retained by the customer without comment” (see 11 O.L.R. at p. 599).
One distinction that emerges from the run of cases is that between a mere signed acknowledgment of the correctness of the account as a periodic settlement and a specific undertaking by the customer to examine the statement and vouchers and to make timely objection; it is the distinction between the form in Bank of Montreal v. The King, supra (and see also the earlier case of Agricultural Savings & Loan Association v. The Federal Bank[19], and that in the Columbia Graphophone case. I have no doubt of the significance of the distinction; it depended, however, on a strict view of the acknowledgment form. In the Agricultural Savings case, Burton J.A. referred to the form therein as “at the most a mere acknowledgment of the correctness of the balance on the assumption that the cheques issued by the plaintiffs had been paid to the proper parties” (6 O.A.R. at p. 200). The question here is whether that very fact does not make it evident that if the bank is to rely on a verification contract it must be able to point to words in the contract that leave no doubt of the scope of the protection which it claims.
That this is the proper answer to the question finds some support in s.49(1) of the Bills of Ex-
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change Act. That clause provides that a forged signature on a bill is wholly inoperative, and no right to enforce payment of the bill can be acquired through such a signature unless the party against whom it is sought to enforce payment is precluded from setting up the forgery. It is not that s.49(1) is of that class of statutes from whose terms there can be no contractual departure. Rather, its express reference to a forged signature appears to me to oblige those who would contract out to make it quite clear that forgery of a drawer’s signature on a cheque is within the scope of the protection that a drawee bank has obtained under its self-protecting contractual arrangements with its depositors.
Apart from any verification agreement, a bank would be answerable for depletion of a customer’s account by reason of any unauthorized dealing, including forgery, unless the drawer was precluded from setting up the want of authority, and the bank would be protected to the degree to which any such preclusion extended. Similarly, apart from a verification agreement, the bank would be answerable for forgery or unauthorized milking of a customer’s account by an employee of the bank; and in this latter respect, the matter would not necessarily depend on principles of vicarious liability but rather would stem from the bank’s obligation to maintain the integrity of a customer’s account against unauthorized withdrawals.
The Royal Bank’s position on the verification agreement is such that it would place upon a customer the duty to detect within the prescribed 30-day period not only forgeries of the customer’s signature by the latter’s employees or by third parties, but also by employees of the Royal Bank. There is the further hurdle, if literalness is to prevail, that it is the account as kept by the bank that has the conclusive effect, regardless of what may have been delivered or not delivered to the customer by way of statements or vouchers.
Forgery and unauthorized debits to a customer’s account owing to the forgery or fraud of third persons or of employees do not exhaust a
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bank’s liability. There is the quite ordinary case of arithmetic error, of failure to credit sums to an account, of wrongful albeit innocent attribution of debits to an account. These are possible, even if infrequent; perhaps as infrequent as forgery and fraud. These instances of breach of obligation to a customer relate directly to what the bank has sought to achieve through the verification agreement. In my opinion, the principal question is not whether the bank has sought to protect itself against its breach of a fundamental term of its relationship with its customer, but rather what is the scope of protection which it has achieved under a document which is more a contract of adhesion than a bargained arrangement.
Neither forgery nor fraud are expressed as risks of the customer. The key words are “verify the correctness” of statements of account received from the bank; “notify the bank in writing… of any alleged omissions from or debits wrongly made to or inaccurate entries in the account”. It is in respect of these, unless there is timely notice, that “the account as kept by the bank shall be conclusive evidence” that it is correct, and that, subject to what is excepted (this includes “payments made on forged or unauthorized endorsements”), the bank is to be free “from all claims in respect of the account”.
I find it strange that a bank which seeks by contract to throw the risk of all forged drawer signatures upon its customer should be so reticent about referring expressly to such an eventuality. It is not as if its verification form lacks subject-matter without it. The verification form, as a matter of words, encompasses the situation which arose in Union Bank of Canada v. Wood. Beyond this or related situations, it surely is, to say the least, “ambiguous” (to use the term applied by Duff J. in the Stewart case) in any suggested application to forgery or fraud. There is every reason to construe it contra proferentem, and I would therefore conclude that its words do not
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provide protection against the forgery of the drawer’s signature.
The construction that I would put on the verification agreement is consistent with the approach to contractual limitations of liability in other kinds of relationships, such as bailee and bailor, carrier and consignor, retailer and purchaser. Risks that are by contract to be passed by a party, upon whom they would otherwise rest, to the other party to the relationship must be brought home expressly if they are to be effective; at least this is so when the limitation would still have subject-matter if unexpressed risks be found to be outside its general language.
There remains on this phase of the case the question whether the bank is in any event entitled to rest on the principle of an account stated or a settled account or whether, if the relations between the parties do involve a stated or settled account, the appellant is entitled to re-open it to show unauthorized debits. The trial judge dealt with this issue by declaring that “[the verification] contract does much more than create settled accounts… If this case involved a mere settled account I would not think the injustice necessary to open such an account has been displayed”. The key to this conclusion appears to be in the trial judge’s finding that “there was no step the bank could have taken to guard against this loss and there were many steps the plaintiff could have taken, any one of which would have discovered the earlier losses and prevented the later large losses”. The basis of this finding is not spelled out until a later part of his reasons where the trial juge dealt with a claim in negligence against the Bank of Montreal (a claim not pursued on appeal), and indicated that he would have found (were it necessary to do so) that the appellant’s negligence was the primary cause of its loss. I shall return to this point later in these reasons.
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In the course of his reasons for judgment in the House of Lords’ decision in Camillo Tank Steamship Co. Ltd. v. Alexandria Engineering Works[20], at p. 143, Lord Cave classified three types of accounts stated. His third class was one “where a claim has been made by one party and the other party has for valuable consideration agreed to accept it as correct… This is a real agreed account, and… cannot be reopened except for fraud or on some other ground which would enable a party to an agreement to have it set aside”. Lord Wright speaking for the Judicial Committee in Firm Bishun Chand v. Seth Girdhari Lal[21], at pp. 468-469, was more pointed in asserting that “it has not been doubted that in law there can be a settled or stated account between banker and customer”. He went on to say that “what has been questioned is whether the acceptance by the customer without protest of a balance struck in the pass-book constitutes a settled account, but the question has had reference merely to the issue whether such a settlement can be inferred as a matter of fact from the passing backward and forward of the pass-book. The legal competence of such a settlement, if made, is not questioned…”
In the present case, the reliance on the verification agreement as establishing a settled account which is unchallengeable must fail because, on the construction I have put on the agreement, there was no settlement made that covered forgery of the drawer’s signature. The settlement could go no farther than the document under which it was asserted.
Is then the Royal Bank’s only defence to the claim of the appellant that the latter is (to refer to what is stated in s.49(1) of the Bills of Exchange Act) precluded from setting up any or all of the forgeries? In examining the scope of this defence and in bringing the facts of this case into relation thereto, I begin by saying here what I might have said as conveniently much earlier in these reasons, that the adoption of verification receipts and verification agreements in this coun-
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try appeared to be a response to judicial reluctance to impose upon a depositor a duty to examine bank statements and to report any discrepancies within a reasonable period.
Such a duty was imposed in the United States, the leading authority being Leather Manufacturers’ National Bank v. Morgan[22]. It goes beyond the holding of a customer to answer for a forgery of which he had knowledge and failed to inform the bank. The Uniform Commercial Code, of almost universal application in the United States, has spelled out this duty in some detail in s. 4-406 as follows:
(1) When a bank sends to its customer a statement of account accompanied by items paid in good faith in support of the debit entries or holds the statement and items pursuant to a request or instructions of its customer or otherwise in a reasonable manner makes the statement and items available to the customer, the customer must exercise reasonable care and promptness to examine the statement and items to discover his unauthorized signature or any alteration on an item and must notify the bank promptly after discovery thereof.
(2) If the bank establishes that the customer failed with respect to an item to comply with the duties imposed on the customer by subsection (1) the customer is precluded from asserting against the bank
(a) his unauthorized signature or any alteration on the item if the bank also establishes that it suffered a loss by reason of such failure; and
(b) an unauthorized signature or alteration by the same wrongdoer on any other item paid in good faith by the bank after the first item and statement was available to the customer for a reasonable period not exceeding fourteen calendar days and before the bank receives notification from the customer of any such unauthorized signature or alteration.
(3) The preclusion under sub-section (2) does not apply if the customer establishes lack of ordinary care on the part of the bank in paying the item(s).
(4) Without regard to the care or lack of care of either the customer or the bank a customer who
(4) Without regard to the care or lack of care of either the customer or the bank a customer who
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does not within one year from the time the statement and items are made available to the customer (sub-section (1)) discover and report his unauthorized signature or any alteration on the face or back of the item or does not within three years from that time discover and report any unauthorized indorsement is precluded from asserting against the bank such unauthorized signature or indorsement or such alteration.
(5) If under this section a payor bank has a valid defense against a claim of a customer upon or resulting from payment of an item and waives or fails upon request to assert the defense the bank may not assert against any collecting bank or other prior party presenting or transferring the item a claim based upon the unauthorized signature or alteration giving rise to the customer’s claim.
Halsbury’s Laws of England, vol. 2, 3rd ed., 1953, at p. 210, states that the authorities in England are conflicting on “whether there is or is not a duty on the part of the customer to examine the pass-book and paid cheques, if returned with it, and to communicate to the banker within reasonable time all debits which he does not admit”. Kepitigalla Rubber Estates Ltd. v. National Bank of India Ltd.[23] is cited as supporting the view that there is no such duty, unless it is imposed by express stipulation. It was a case where a company, a customer of defendant bank, recovered the amounts of a number of cheques on which the drawer signatures were forged by the company’s secretary and which had been debited to the company. The significance of the Kepitigalla case for Canada is that it was referred to with approval by Middleton J. in the Columbia Graphophone case. There Middleton J. noted that a duty to the bank may arise after a customer has knowledge of a forgery. Ewing v. Dominion Bank[24] (leave to appeal refused[25]) goes far in this respect in its holding, by a bare majority, that a person may come under a duty to a bank where he is informed that a note of his, which was in fact forged, and which the bank had dis-
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counted, was coming due; and he may incur liability if he does not respond and in the result the proceeds thereof are withdrawn. I point out that the case was dealt with in terms of estoppel which involved turning the so-called duty into a representation by silence.
I do not think it is too late to fasten upon bank customers in this country a duty to examine bank statements with reasonable care and to report account discrepancies within a reasonable time. The Supreme Court of California in Pacific Coast Cheese Inc. v. Security First National Bank of Los Angeles[26] has stated the applicable principle as follows (at p. 355):
The general rule is that a bank may not charge its depositor’s account with payments made on altered or forged checks unless some conduct of the depositor falling under the principles of negligence or estoppel contributed to the loss and the bank was itself free from negligence… This rule has been applied where as here the alteration or forgery was committed by an employee of the depositor… When it appears that a bank has made payment on the basis of an altered or forged check, the burden is on the bank to justify the charge by establishing, as an affirmative defence, both that it was free from negligence and that the depositor was negligent or was estopped to deny the correctness of the payments.
This principle would be consistent with the duty of which I speak, a duty that would not, however, be as draconian as that which the bank has sought to fasten upon the appellant under the verification agreement.
(1) The effect of the provisions of this Article may be varied by agreement except that no agreement can disclaim a bank’s responsibility for its
(1) The effect of the provisions of this Article may be varied by agreement except that no agreement can disclaim a bank’s responsibility for its
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own lack of good faith or failure to exercise ordinary care or can limit the measure of damages for such lack or failure; but the parties may by agreement determine the standards by which such responsibility is to be measured if such standards are not manifestly unreasonable.
(2) Federal Reserve regulations and operating letters, clearing house rules, and the like, have the effect of agreements under subsection (1), whether or not specifically assented to by all parties interested in items handled…
the effect of provisions of this Act may be varied by agreement, except as otherwise provided in this Act and except that obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable.
The foregoing provisions say nothing about the reach or construction of exculpatory agreements which do not offend its limitations on a bank’s right to contract out of liabilities. That is left to what I may call the general law; and I have already indicated my approach to it in respect of the verification agreement put forward in this case. I need only add here that, even apart from my view of its scope, that agreement could not have its full literal force if the limitations of ss. 1-102 and 4-103 were applied to it.
The facts found in the present case go, however, beyond any failure to meet the duty that I have suggested, and hence make it unnecessary for me to determine how many of the forgeries would have to be borne by the bank by reason of a breach of duty which arose only in relation
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to the submission of statements of accounts to the appellant. The trial judge absolved the bank of any negligence in relation to the forgeries, which were skilfully executed, and dealing with the appellant’s conduct of its business, he made the following findings:
The plaintiff employed a person they knew had been found to be untrustworthy in the past and placed him in a position of complete trust where no one checked upon his work adequately. The procedures followed by the plaintiff and its auditors were inadequate to discover the fraud and to discover that its books had not balanced for a number of years. Cheques remain today in which the duplicate shows one payee and the original another. The accounts payable had not balanced for years. In each of the months in which there was a forged cheque Mr. Seear was permitted to extract the cheque and complete the balancing. He was a very personable fellow, well trained in accounting. If the plaintiff had employed proper procedures it seems reasonable to expect that it would have discovered some of the forgeries, that its bank’s returns did not balance in many months, that its accounts payable did not balance, or that its cheques were not in accordance with the duplicate register. One would have expected that in an organization handling money in the amounts that this plaintiff handled, no person would be so wholly entrusted with responsibility that no other person’s duties would involve a check upon him. In this case the plaintiff knew that the person in that position had been discharged from his former employment because it was found that he could not be trusted.
On these findings, relating as they do to the particular facts of this case, I am of the opinion that the appellant is precluded from claiming against the Royal Bank on any of the seventy-two cheques which are the subject of its action.
This conclusion is enough to dispose of the alternative claims against this bank for money had and received and for conversion. I do not pause to examine the appropriateness of these causes of action to a claim made by a customer against its bank. What is obvious is that the appellant cannot be in any better position on his alternative causes of action than he is on his main allegation. It would require mounting fiction upon fiction by way of ignoring the findings of fact to
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conclude that the bank has improperly retained money (or improperly debited the account) of the appellant, or has made a wrongful appropriation of assets of the appellant so as to be guilty of tortious conduct.
The claim of the appellant against the Bank of Montreal, the collecting bank, for conversion, or, alternatively, for money had and received, was rejected by the trial judge on the ground that the principle of Price v. Neal[27] applied to bar a drawer, who must be taken to know his own signature, from throwing upon an innocent third party the loss resulting to him from the payment out of his account of the amounts of the forged cheques. He distinguished the present case from one where the drawer’s signature was genuine but the amount of the cheque was wrongly raised. In his view,
The drawer’s cause of action against his own bank gives him adequate protection. If he chooses to bargain that cause of action away or allow it to lapse, the loss should not be imposed on an innocent third party.
This last statement referred, of course, to the trial judge’s appreciation of the effect of the verification agreement.
In the Court of Appeal, Robertson J.A., with whom Taggart J.A. agreed, said in summation (after exploring the theory upon which conversion lies for the value represented by a bill of exchange) that “in order to succeed on a claim of this kind, the plaintiff must be the true owner of the piece of paper qua cheque and not simply the owner of the piece of paper qua piece of paper”. Nemetz J.A. in concurring reasons rejected the claim for conversion because the so‑called cheques were admittedly not bills of exchange, as defined in the Bills of Exchange Act; and hence the collecting bank could not be guilty of conversion so as to be answerable for the face value of the forged cheques for which it had received payment from the drawee bank.
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The technical result of the forgeries in destroying the “bills of exchange” character of the documents in this case does not make it any less true that the value of the appellant’s chose in action against the Royal Bank had been considerably diminished by the action of the collecting bank. But this is so in the present case only because the drawer’s bank was, on the facts, not liable to make good to the drawer the amounts of the forgeries. The collecting bank was merely carrying out its duty to its customer; and the fact that he was the forger would not, on that ground alone, affect its position unless it knew or could reasonably be fixed with knowledge of the forgeries, and only to the extent of such knowledge or attribution thereof. The overriding question here is whether, despite want of knowledge or want of any basis of attribution thereof, a collecting bank is at the peril of a successful claim by the drawer whose signature has been forged because that bank has received money on the presentation of worthless documents and thus has reduced the credit position of the drawer with its own bank. The issue arises only because the collecting bank had both surrendered the documents and had in turn paid out to its fraudulent customer what it collected before having any knowledge of his criminal actions; and, above all, it arises because the drawer finds himself without recourse against the paying bank.
There is in this case no tenable claim for money had and received if there is no recovery for conversion. Although the former is not tied to conversion—it may, for example, arise where there has been a failure of consideration—the basis of the claim here for money had and received is the allegedly tortious conduct of the collecting bank, and the claim would arise upon a waiver of the tort. What, then, is the tort, with ensuing damage, which the collecting bank has committed against the appellant? It has not deprived the appellant of the fruits of bills of exchange to which the appellant was entitled. It has not knowingly assisted in perpetrating a fraud through which the appellant suffered a loss. It was not fixed with notice of the forgeries, or any
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of them, at a time when the forger’s accounts with it were still on the credit side, so as to support a claim to follow the money.
I do not find it necessary to consider the Bank of Montreal’s position as a holder for value. Certainly, in such a case, the doctrine of Price v. Neal, supra, would protect it against a claim by the drawee; and equally, it seems to me, against a claim by the drawer who would be expected to have recourse against the drawee. I look upon the present case as one where, as between the appellant and the collecting bank, the loss suffered as a result of the forgeries must lie where it has fallen.
I would dismiss the appeal against both banks with costs
Appeal dismissed with costs.
Solicitors for the plaintiff, appellant: Lawrence & Shaw, Vancouver.
Solicitors for the defendant, respondent, The Royal Bank of Canada: Bull, Housser & Tupper, Vancouver.
Solicitors for the defendant, respondent, Bank of Montreal: Campney, Murphy & Co., Vancouver.
Footnotes
- [1] [1971] 3 W.W.R. 241, 19 D.L.R. (3d) 420.
- [2] [1930] S.C.R. 544.
- [3] [1932] S.C.R. 131.
- [4] (1907), 38 S.C.R. 258.
- [5] (191638 O.L.R. 326.
- [6] [1938] O.W.N. 166.
- [7] (1953), 10 W.W.R. (N.S.) 553, [1954] 2 D.L.R. 753.
- [8] (1969), 11 D.L.R. (3d) 610.
- [9] [1914] 3 K.B. 356.
- [10] [1929] 1 K.B. 40.
- [11] (1916), 38 O.L.R. 326.
- [12] [1920] 3 W.W.R. 173.
- [13] [1932] S.C.R. 131.
- [14] [1930] S.C.R. 544.
- [15] [1938] 2 D.L.R. 764n, [1938] O.W.N. 166.
- [16] (1953), 10 W.W.R. (N.S.) 553, [1954] 2 D.L.R. 753.
- [17] (1969), 11 D.L.R. (3d) 610.
- [18] (1907),38S.C.R. 258.
- [19] (1880), 45 U.C.Q.B. 214, aff’d. (1881), 6 O.A.R. 192.
- [20] (1921), 38 T.L.R. 134.
- [21] (1934), 50T.L.R. 465.
- [22] (1885), 117 U.S. 96.
- [23] [1909] 2 K.B. 1010.
- [24] (1904), 35 S.C.R. 133.
- [25] [1904] A.C. 806.
- [26] (1955), 286 P. 2d 353.
- [27] (1762), 3 Burr. 1354, (1761), 1 Black. W. 390.
Cases cited
- Bank of Montreal v. The King Bank of Montreal v. The King, supra
- Price v. Neal Price v. Neal, supra
Statutes and regulations cited
-
Unresolved citations
- subsection (1)
- section (2)
- section (1)