Court File and Parties

COURT FILE NO.: 349/06 DATE: 2006-12-12 SUPERIOR COURT OF JUSTICE – ONTARIO DIVISIONAL COURT

RE: 1245094 ONTARIO INC. v. BANK OF MONTREAL et al. v. ROYAL BANK OF CANADA et al.

BEFORE: H. Spiegel J.

COUNSEL: Kathryn Podrebarac, for the Moving Party, Zellers Inc. Irving Marks, for the Respondent, Bank of Montreal

HEARD: December 7, 2006

ENDORSEMENT

[1] Zellers seeks leave to appeal the order of John Macdonald J. of July 5, 2006, granting the Bank of Montreal’s (BMO) appeal from the order of Master Haberman dismissing BMO’s motion to amend its third party claim. The Master accepted the submissions of Zellers who opposed the amendments on the grounds that the claims being asserted in the amendment were not tenable in law in that a drawer of a cheque does not owe any duty of care to a collecting bank. The Master framed the issues in the motion in the form of these two questions.

(i) Does the law currently recognize the existence of the duties asserted between an individual and a collecting bank?

(ii) If not, is there scope within the current state of law for the creation of such duties, on a policy basis?

[2] The Master answered both of these questions in the negative. In arriving at this conclusion she relied heavily on the Supreme Court of Canada decision in CP Hotels Limited v. Bank of Montreal (1987) 1987 55 (SCC), 1 SCR 711 a case in which CP Hotels sought to recover from its own bank the monies taken from its account in payment of some cheques which had been forged by employees of CP. The bank sought to defend this claim on the basis that CP was precluded from relying on the forgery or fraud as a result of their own negligence. Ledain J. writing on behalf of the majority concluded that a customer of the bank did not, in the absence of a verification agreement owe a duty to its bank to examine its bank statements and vouchers within a reasonable or to report any discrepancies with a reasonable time or a duty to maintain an adequate system of internal controls for the prevention and minimization of loss through forgery.

[3] Ledain J. noted that it had not been argued before the Supreme Court of Canada that duties of care contended for by the bank could arise in tort if they did not exist in contract. However in order “that there should not remain uncertainty, as to whether the customer of a bank could owe a duty in tort in the absence of a verification agreement” he stated:

“I am of the opinion assuming it to be arguable that a duty could arise in tort, that the principle of concurrent or alternate liability in contract and in tort affirmed in Rafuse cannot extend to the recognition of a duty of care in tort when that same duty of care has been rejected or excluded by the courts as an implied term of a particular class of contract”.

[4] BMO submitted before the Master that a different result should ensue where there as no contractual framework into which such duties could be injected. The Master rejected this submission holding that this was not the only basis for the Supreme Court’s refusal to recognize the existence of the duty on the customer. She concluded that the existence of these duties between a party and a collecting bank cannot be reconciled with the clear statement of law that no such duties exist as between a party and its own bank.

[5] Macdonald J. disagreed with the Master in this regard, holding that the ratio and result in CP Hotel’s case were reconcilable with the proposition that a tortious duty established in accordance with the principles set out in Anns v. Merton could possibly be imposed on the drawer of a cheque. Macdonald J. described the ratio in CP Hotels as “addressing the effects of a contractual relationship in which the parties have arranged their affairs and assumed rights and obligations of their choosing, upon the question of whether a separate duty in tort should be imposed on one of them”. In Macdonald J.’s view, the presence of a contractual relationship may often prevent the imposition of a tortious duty upon one of the contracting parties that is inconsistent with the contractual scheme. He therefore concluded that a tortious duty may well exist in circumstances where there was no contractual relationship depending upon the proper application of the Anns test.

[6] He further held that it was inappropriate to determine on a pretrial motion whether the Anns analysis would preclude the proposed claims. He characterized the claims being asserted as novel and that while the claims are “problematic and questionable” the decision whether they are tenable in law should be made on the basis of facts determined at the trial.

[7] The learned Master also found support for her decision in the case of Nesbitt Burns v. Canada Trustco Mortgage [2000] OJ No. 868 (C.A.). This was a case in which the plaintiff sued his bank for damages for conversion with regard its payment of certain cheques which were fraudulently endorsed by an employee of Nesbitt Burns to himself and presented it for payment at his bank, Canada TrustCo. The bank in its defence claimed that Nesbitt, as drawer of the cheques, had voluntarily assumed the risk that the endorsements were not authentic. Nesbitt moved to strike out the defences. The Motions Judge held that the plaintiff’s claim was based on the tort of conversion which was a strict liability tort and that insofar as the pleading amounted to a claim of contributory negligence it was not available as a defence. The Motions Judge also equated the plea of contributory negligence to the plea of preclusion and struck that pleading as well. On appeal the Court of Appeal agreed that the plea of contributory negligence was properly struck out but allowed Canada TrustCo to amend its defence to rely on the defence of preclusion which was not based on an apportionment of liability and was thus available as a defence.

[8] Feldman J. in the Court of Appeal made reference to the CP Hotels case and noted that it dealt with a duty owed by a customer under its contract with its own bank and not with any duty which might arise between a drawer of a cheque and the collecting bank. She noted that any such duty would have to be based on the test set out in Anns which requires a relationship of proximity or neighbourhood between such parties. She observed that “any recognition of such a duty would be subject to the observations made by both Ledain J. and LaForest J. that although the law is not frozen, any new developments will be informed by what has been held to be the very narrow scope of the contractual duty owed by a customer to its bank and the policy behind that law”.

[9] In reference to Nesbitt Burns, Macdonald J. noted that the comments of Feldman J. aforementioned were obiter dictum and while they were persuasive they were not determinative. He stated that the Court of Appeal in Nesbitt Burns did not preclude the existence of a tortuous duty based on the Anns test in the circumstances of the case at bar.

[10] Counsel for Zellers very forcefully and capably argued before me that Macdonald J. erred in concluding that BMO’s negligence claims set out in its amended pleading are tenable at law and not certain to fail. Zellers submits that Justice Macdonald’s finding is irreconcilable with its acknowledgement that the Supreme Court of Canada has found that no such duty exists between and drawer of a cheque and its own bank and the Court of Appeal’s holding that the duties of a drawer of a collecting bank are narrower than those between a drawer and its own bank.

[11] Zellers further submits that there is good reason to doubt the correctness of Justice Macdonald’s decision that the determination of the issue of whether the duty exists or not should be made after a full evidentiary record has been established. Zellers relies on the case of Morgis v Thomson Kernaghan & Company (2003) 2003 5999 (ON CA), O.J. 2504, para 37 and 41 as well as Mitchell (Litigation Administrator) v. Ontario (2004) 2004 4044 (ON SCDC), 71 O.R. 3d 571 (Div. Ct.) where the court also rejected a similar submission that the issue of whether a new duty of care should exist at law should be left to be determined at trial on a full record.

[12] In response to the latter submission, BMO relies on Anger v. Berkshire Investment Group Inc. (2001) (Carswell Ont.), 329 (C.A.) where the Court of Appeal held that the importance of the specific factual matrix of each case in determining whether novel claims met the two part Anns/Kamloops test and that both the proximity factors and the policy factors are fact driven. The court stated that to attempt to apply policy considerations in a vacuum without the benefit of a record would be contrary to the principles upon which our caselaw has long been understood to develop. It is for this reason that a court should strike a claim only if it is clear that in law the case cannot succeed based on decided principles directly applicable to the case as set out in the pleadings and the court should not develop law including policy considerations in order to strike a claim. That should only be done after a trial.

The test for Granting Leave

[13] Zellers concedes that in order to succeed it must convince me that they have met both branches of rule 62.02 (4) (b) as set out.

Is there a good reason to doubt the correctness of the order of Macdonald J.?

[14] I am aware that in order to comply with this branch of the test it is not necessary for me to find that his decision was wrong or even “probably wrong”.

[15] I have given this matter some considerable deliberation and although counsel for Zellers has made a very convincing argument, I am not prepared to find that it has met the test set out in the first branch of the rule. In my view Justice Macdonald’s decision was well reasoned and correctly sets out the relevant issues and the correct principles of law. I think the same is true about the decision of the learned Master. Indeed Justice Macdonald adopted many of the findings of the learned Master. Where he differed from her was in her conclusion that the claim set out in the proposed amendment was certain to fail. Macdonald J. while acknowledging that the claims were problematic and questionable, was not prepared to find that they were certain to fail. I am not prepared to find that there is good reason to doubt the correctness of his decision.

Does the proposed appeal involve matters of such importance that leave to appeal should be granted?

[16] Zellers argued that the issues raised in the appeal transcend the interests of the parties and are of national and international implication in that it affects the drawers of all cheques in Canada not just Zellers. In paragraph 38 of Zellers’ factum, the following rhetorical question is put:

Should such a novel and arguably entirely legally untenable claim be allowed to proceed to trial without appellate review at the cost of certainty in an area of national and international importance?

[17] If Macdonald J. held that the drawer of a cheque owes a duty of care to a collecting bank, I would agree that the proposed appeal would meet the second branch of the test. However, in my view his decision merely decided that the claim that such a duty of care exists is not clearly untenable and that therefore an amendment to a pleading to assert such a claim ought to be allowed in accordance with the well-established law relating to amendment of pleadings.

[18] With respect to the rhetorical question posed by Zellers in their factum I would observe that Justice Macdonald’s decision does not mean that the claim must be allowed to proceed to trial without appellate review. In my opinion it is open for Zellers, if they see fit, to bring a motion for summary judgment on that part of the third party claim, either before or after discoveries on the basis that the claim does not raise a genuine issue for trial.

Disposition

[19] In the result the motion for leave is denied. Zellers delivered a costs outline pursuant to rule 57.01 (6) in support of their claim for costs if successful, which totaled $4,833.88. BMO did not file a cost outline. In my view this is a factor that can be taken in determining the question of costs. I note that Macdonald J. ordered that the entitlement to costs should be dependent upon the outcome of the claim asserted in the amended pleading. I propose to follow to take a similar approach although I do not intend to award costs to Zellers regardless of the outcome of this issue. I therefore fix the costs of BMO in the amount of $4000 inclusive of GST payable in the cause (i.e. if they are successful in their claim asserted in their amended third party pleading).

H. Spiegel J.

DATE: December 12, 2006