COURT OF APPEAL FOR ONTARIO
O’Connor A.C.J.O., MacPherson and Rouleau JJ.A.
BETWEEN
Teva Canada Limited
Plaintiff (Respondent)
and
Bank of Montreal, Canadian Imperial Bank of Commerce, TD Canada Trust and Bank of Nova Scotia
Defendants (Appellant)
AND BETWEEN
The Bank of Nova Scotia
Plaintiff by Counterclaim
and
Teva Canada Limited, Neil Kennedy McConachie, Renzo G. Tittarelli and Florindo Costanzo
Defendants by Counterclaim
Martin Sclisizzi, for the appellant, Bank of Nova Scotia
Sean Cumming and Colby Linthwaite, for the respondent, Teva Canada Limited
Heard: July 5, 2012
On appeal from the order of Justice Sandra Chapnik of the Superior Court of Justice, dated October 28, 2011.
By the Court:
1This appeal results from the refusal by the courts below to allow the appellant, Bank of Nova Scotia, to amend its statement of defence to plead the defence of estoppel.
2The respondent, now named Teva Canada Limited, sued Bank of Nova Scotia in conversion. The claim arises from a fraud allegedly carried out by McConachie, an employee of Teva. The statement of claim alleges that McConachie, perhaps with others, caused Teva to issue cheques to companies with similar sounding names to Teva’s customers. He deposited 43 cheques in accounts at Bank of Nova Scotia over a period of two years. Bank of Nova Scotia presented the cheques to Teva’s bank for payment, collected the proceeds and credited the proceeds to the accounts opened by McConachie. Teva claims $4,000,000 from Bank of Nova Scotia for conversion as well as consequential damages.
3In its statement of defence, Bank of Nova Scotia denies conversion because there were no endorsements on the cheques and the cheques were deposited in accounts in the payees’ name.
4Bank of Nova Scotia moved before Master Graham to amend its statement of defence to plead estoppel.
5The Master refused the amendments on the basis that Bank of Nova Scotia had not pleaded sufficient details in support of the defence of estoppel. In particular, the proposed pleading did not include allegations of representations made by Teva to Bank of Nova Scotia, breaches of duty by Teva or reliance on such breaches by Bank of Nova Scotia.
6Bank of Nova Scotia appealed to the Divisional Court. Chapnik J. dismissed the appeal.
7With the consent of Teva, the appeal judge considered a new proposed statement of defence in which Bank of Nova Scotia included more particulars of the estoppel defence in an attempt to address the deficiencies identified by the Master. There are two parts to the proposed pleading of estoppel. The first alleges that Teva knew of the fraud and breached a duty to prevent a continuation of the fraudulent conduct. In oral argument, Teva’s counsel accepted that Bank of Nova Scotia should be permitted to plead Teva’s actual knowledge of the fraud and rely upon the consequences flowing from that knowledge.
8The second and main part of the proposed pleading alleges that Teva was negligent in failing to ensure the cheques drawn on its accounts were properly drawn. This is often referred to as estoppel by negligence. It asserts that if Teva had examined the cheques in a timely way, it would have detected the fraud and should have taken steps to prevent further fraud. It also pleads that it relied on Teva’s failures to its detriment.
9In dismissing the appeal, the appeal judge concluded that the proposed amendment “is rooted in generalities and does not plead any of the required elements [of estoppel] substantively”.
10The appeal judge went on to hold that, in any event, the proposed defence of estoppel by negligence is untenable in law. She pointed out that the tort of conversion on which Teva’s claim is based is one of strict liability in matters concerning bills of exchange. She referred to the Supreme Court of Canada’s decision in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. at 727, where the court held that contributory negligence is not available as a defence to a claim similar to the present one against a bank based in conversion. She reasoned that there is no fundamental distinction between the common law defence of contributory negligence and the equitable defence of estoppel by negligence. The appeal judge observed that there is no Canadian authority holding that estoppel by negligence constitutes a defence to a conversion action in circumstances involving the processing of bills of exchange by banks.
11Bank of Nova Scotia appeals to this court with leave.
12As mentioned, Bank of Nova Scotia’s plea is primarily focussed on a defence of estoppel by negligence. It argues that estoppel by negligence has the following elements: a) the representor owed a duty of care to the representee; b) the representor negligently or carelessly failed to perform the duty; c) the negligence of the representor caused the representee to believe a certain state of facts; and d) the negligence was the proximate or real cause of a loss to the representee.
13Bank of Nova Scotia fairly concedes that the duty of care owed by a drawer of a cheque to the collecting bank that it wishes to plead has not, to this point, been recognized by a Canadian court, but argues it is analogous to a recognized duty. As such, this is an appropriate case to apply the two-step test set out in Anns to determine if the court should recognize a new duty of care. It goes on to argue that the determination as to whether a new duty of care should be recognized should not be resolved at a preliminary stage on a motion to amend a pleading. Rather, it says that the existence of such a duty and the scope and content of the duty should be determined at a trial on a full evidentiary record.
14Teva agrees that there is no recognized duty of care owed by a drawer of a cheque to a collecting bank. It argues, however, that the law in this area is settled and this is not a case where Anns could possibly apply.
15We agree with the motion judge that the Supreme Court of Canada’s decision in Boma is dispositive of Bank of Nova Scotia’s plea of estoppel by negligence. In our view, there is no basis to distinguish what the court said in Boma with respect to a defence of contributory negligence when considering this proposed defence.
16Like the present case, Boma involved a fraudulent employee who caused cheques to be issued in names similar to people that the company dealt with, but for amounts which were not due. As in this case, the bank received the cheques from the fraudulent employee, who had no title to them, and collected on them from the employer’s bank. In doing so, the collecting bank was, prima facie, liable for the tort of conversion.
17In Boma, Justice Iacobucci for the majority reviewed the law of conversion and confirmed the longstanding rule that the tort of conversion is a matter of strict liability. The bank in that case had argued that the drawer of the cheque was in the best position to detect its employee’s fraud and that it was negligent in failing to do so. Justice Iacobucci stated at para. 32 that “the notion of strict liability involved in an action for conversion is primarily antithetical to the concept of contributory negligence” and concluded, at para. 35:
As I stated above, however, it seems as a matter of principle that contributory negligence would not be available in the context of a strict liability tort. If the contributory negligence approach is to be introduced into this area of law, I would leave that innovation to Parliament because such a change would be more appropriate for the legislative branch to make. As I see it, the strict liability feature of conversion is well engrained in the jurisprudence concerning bills of exchange. [Emphasis added.]
18Estoppel and contributory negligence are separate legal concepts. Both, however, would require an assessment of the same facts surrounding the conduct of Bank of Nova Scotia and Teva and would require a determination based on findings of the respective negligence of the maker of the cheque and the bank.
19In Boma, the court recognized that there is a tension between the law’s need for certainty and equity’s need to achieve objectively fair results. In the case of bills of exchange, courts of law and equity over several hundred years have determined that certainty is the predominant value and that the operation of an efficient banking market requires strict adherence to objective rules for the allocation of risk.
20We are of the view that if one applies the line of reasoning set out by the court in Boma to the circumstances in this case, it is not tenable that a court would recognize the new duty of care urged by Scotia Bank, nor would it recognize the availability of a defence of estoppel by negligence which Bank of Nova Scotia seeks to plead. Doing so would change the allocation of risk and affect the certainty with which participants in the banking system now conduct banking transactions.
21We would add to the above what LaForest J. said in a concurring judgment in C.P. Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC), [1987] 1 S.C.R. 711. The court in that case was considering the question of previously unrecognized duties owed by a drawer of a cheque to its own bank. The court declined to recognize a wider duty than had been previously found to exist. At p. 779, LaForest J. said the following:
A major reason for the rejection of a wider duty is that already mentioned: the need for a rule that was clear in most circumstances, cutting within a narrow compass the cases where the loss was directly attributable to the customer because of negligence or otherwise. Parke B. clearly expressed the policy militating against a wider duty in Bank of Ireland v. Evans’ Trustees (1855), 5 H.L.C. 389, 10 E.R. 950, at pp. 410-11 (H.L.C.), p. 959 (E.R.):
If such negligence could disentitle the Plaintiffs, to what extent is it to go? If a man should lose his cheque-book, or neglect to lock the desk in which it is kept, and a servant or stranger should take it up, it is impossible in our opinion to contend that a banker paying his forged cheque would be entitled to charge his customer with that payment.
Such broad uncertainty is out of place in the governance of negotiable instruments.
22In our view, that reasoning is apposite the circumstances in this case. In summary, we agree with the appeal judge that the proposed plea of estoppel by negligence is not tenable and that leave to amend to assert that plea should not be granted.
23In the result, we would allow the appeal to the extent of giving leave to Bank of Nova Scotia to amend its statement of defence to plead defences arising from Teva’s actual knowledge of the fraudulent conduct.
24In all other respects, the appeal is dismissed. We direct that Bank of Nova Scotia pay Teva’s costs of the appeal fixed in the amount of $10,000, inclusive of disbursements and HST.
Released:
“JUL -9 2012” “Dennis O’Connor A.C.J.O.”
“DOC” “J.C. MacPherson J.A.”
“Paul Rouleau J.A.”
