Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 S.C.R. 727

Boma Manufacturing Ltd. and Panabo Sales Ltd. Appellants

v.

Canadian Imperial Bank of Commerce Respondent

Indexed as: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce

File No.: 24520.

1996: March 26; 1996: November 21.

Present: Lamer C.J. and La Forest, L’Heureux‑Dubé, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.

on appeal from the court of appeal for british columbia

Bills of exchange ‑‑ Cheques ‑‑ Conversion ‑‑ Defences ‑‑ Companies’ bookkeeper issuing series of fraudulent cheques payable to third parties and depositing them to her bank accounts ‑‑ Bookkeeper forging payees’ signature on certain cheques ‑‑ Other cheques accepted by collecting bank without endorsement ‑‑ Whether collecting bank liable to companies for conversion ‑‑ Whether cheques payable to fictitious or non‑existing person ‑‑ Whether collecting bank holder in due course ‑‑ Bills of Exchange Act, R.S.C., 1985, c. B‑4, ss. 20(5), 165(3).

The appellants, two small, family‑owned companies whose only shareholders and officers are M and his wife, were defrauded by their bookkeeper A through a series of fraudulent cheques issued over a five‑year period. A, along with the two principals, was a duly authorized signing officer on the bank accounts maintained by the companies. Cheques drawn on these accounts required only one authorized signature. A used the appellants' pre‑printed cheque forms to create some 155 cheques totalling $91,289.54, payable to a number of persons connected with the appellants, including the principals, several employees, and one of the subcontractors, Van Sang Lam (all but one of the cheques payable to Lam were made to "J. Lam" or "J. R. Lam", the initials and the last name mimicking the name of A's first husband). A signed 146 of the cheques on behalf of the appellants, and fraudulently obtained M's signature on the other nine. She deposited all the cheques into one of her accounts at the respondent bank. The respondent bank’s policy with respect to a customer wishing to deposit a third party cheque to her account was to require that the cheque be endorsed by the payee. However, the bank accepted 107 of the cheques payable to "J. Lam" or "J. R. Lam" for deposit without endorsement. The tellers apparently assumed that the payee was A’s first husband. A forged endorsements on some of the Lam cheques, and on all of the cheques payable to other third parties. The appellants brought an action in negligence, and in the alternative, conversion, against their own bank and against the respondent. They were successful at trial, and the respondent was ordered to pay $91,289.54. A majority of the Court of Appeal allowed the respondent’s appeal, reducing the judgment so as to reflect only the amount of the nine cheques bearing M's signature.

Held (La Forest and McLachlin JJ. dissenting on the appeal): The appeal should be allowed and the cross‑appeal dismissed.

Per Lamer C.J. and L’Heureux‑Dubé, Sopinka, Gonthier, Cory, Iacobucci and Major JJ.: A bill of exchange is a chattel that can be negotiated from party to party. Title to a bill, such as a cheque, is obtained through negotiation. Once an individual has obtained title, that individual has the right to present the bill to the drawee for payment, as well as a right of recovery against the drawer if the bill is dishonoured by the drawee. If a bank pays to its customer the amount of a cheque to which that customer is not entitled, the bank will be strictly liable to the owner of the cheque for conversion. As a matter of principle contributory negligence is not available in the context of a strict liability tort. If the contributory negligence approach is to be introduced into this area of the law, it must be at the instance of the legislative branch.

The respondent is prima facie liable to the drawer for conversion in this case. The general rule is that a forged or unauthorized endorsement is wholly inoperative, and no right to retain the bill or to enforce payment thereof can be acquired through or under such a signature. An exception to this rule appears in s. 20(5) of the Bills of Exchange Act, which provides that a bill payable to a fictitious or non‑existing person may be treated as payable to bearer. A cheque payable to bearer can be negotiated by simple "delivery" to the bank; endorsement is not required. If the cheques in question were payable to fictitious persons, and could accordingly be treated as bearer cheques, the bank would become a "holder in due course" pursuant to s. 73 of the Act despite the forged and missing endorsements and would consequently have a defence against liability for conversion. The policy underlying the fictitious person rule seems to be that a drawer who has drawn a cheque payable to order, not intending that the payee receive payment, loses, by his or her conduct, the right to the protections afforded to a bill payable to order.

Many of the cheques in question were payable to "real" persons, albeit persons to whom no money was owed by the companies. Because A, the writer of the cheques, did not intend these payees to receive the proceeds of the cheques, the Court of Appeal concluded that the drawer of the cheques intended them to be payable to bearer. The Court of Appeal erred in focussing on A’s intention. It is the intention of the drawer that is significant for the purpose of s. 20(5), not the intention of the signatory of the cheque. A is not the drawer because she cannot be said to be the guiding mind of the corporate appellants; she simply had signing authority within limited circumstances. The relevant intention in this case is that of the appellant companies, as expressed by their guiding mind.

Where a drawer is fraudulently induced by another person into issuing a cheque for the benefit of a real person to whom no obligation is owed, the cheque is to be considered payable to the payee and not to a fictitious person. Here the cheques payable to actual persons associated with the appellants were not payable to fictitious persons, and could not be treated by the respondent bank as payable to bearer. While many of the cheques were made payable not to actual persons associated with the companies, but to "J. Lam" and "J. R. Lam", M was reasonably mistaken in thinking that the payee was an individual associated with his companies. These cheques thus could not be treated by the respondent bank as payable to bearer. While the cheques certainly were "delivered" by A to the respondent bank within the meaning of s. 2 of the Act, for negotiation to be effected endorsement by the payee was required.

Under s. 165(3) of the Act, a bank that collects a cheque for deposit to the credit of a person and that credits that person with the amount of the cheque acquires all the rights and powers of a holder in due course of the cheque. The “person” in this section means a person who is entitled to the cheque. Consequently, s. 165(3) does not apply to the facts of this case. A was not the payee or a legitimate endorsee of the cheques in question, and accordingly she was not a "person" within the meaning of s. 165(3). Absent valid endorsements, the cheques were not validly negotiated to the bank. As a result, the respondent bank took the cheques subject to the equities of the situation. A was not entitled to the cheques, but the respondent bank credited her with the amount of those cheques. This constitutes conversion, for which the bank is strictly liable.

Per La Forest and McLachlin JJ. (dissenting on the appeal): The underlying conflict that arises when trying to decide the scope and application of s. 20(5) of the Bills of Exchange Act is that of the allocation of loss as between the accepting bank and the drawer of a fraudulent cheque. This conflict becomes ripe when it is an employee of the drawer, or a third person, who perpetrates the fraud and the loss must be borne by one of two innocent parties. As between the employer/drawer and the accepting bank, the employer/drawer should bear the risk of any loss and is in the best position to minimize that risk. As demonstrated by the facts of this case, it is easy enough for the perpetrator to forge the endorsement of the named payee and there is no way for the bank to verify the authenticity of the signature. On the other hand, the employer/drawer is in a much better position to put a stop to fraud of this type and is at least in an equal position to bear any loss. As a matter of course, any risk of loss on the part of a large corporation is generally covered by fidelity insurance. It is also possible for large‑scale fraud to be discovered through audits or other protective measures. Allocating the loss to the accepting bank removes all incentive from a corporation to pursue business practices that will minimize such losses. Furthermore, such an allocation does not fit in well with the general scheme of bills of exchange, since the essence of a bill of exchange is its negotiability and the finality of payment inherent to such a negotiation.

Of the 155 fraudulent cheques, 41 were made out to existing employees of the appellants. With respect to the three cheques out of the 41 which A fraudulently produced and then induced M to sign, the respondent bank’s defence under s. 20(5) must fail in light of this Court’s decision in Concrete Column Clamps. However, the remaining 38 cheques prepared and signed by A, and payable by way of pretence to employees of the appellants, are payable to fictitious persons within the meaning of s. 20(5) of the Act and consequently must be treated as payable to bearer. The respondent bank is a holder in due course of these cheques and cannot be liable to the appellants for conversion. The application of the law of agency leads to the inevitable conclusion that where the fraudulent employee is a signing officer of the drawer, then his or her intent must be taken as being the intent of the drawer. While A clearly acted beyond the ambit of what the appellants had in mind when she prepared and signed cheques made out to payees who were not their creditors, it is equally clear that to the eyes of a third party she would have had the apparent authority to sign the cheques as she was an acknowledged signing officer of both companies. The intent of A is thus also the intent of the appellants, the drawer of the cheques. Assuming it is possible to do so, this is not an appropriate case for apportionment.

The test for a non-existent person under s. 20(5) is an objective one and involves a determination of whether the payee is a matter of invention and not a real person. The 114 cheques payable to D. Lam, J. Lam or J. R. Lam were payable to non‑existent persons within the meaning of s. 20(5) and are therefore to be treated as payable to bearer. The respondent bank is accordingly a holder in due course of these cheques and has a complete defence against the action of the appellants. Section 165(3) should be given the interpretation adopted by Iacobucci J. both to avoid disharmony with the general scheme for cheques set out in the Act and to prevent injustice, and is thus not available as a defence to the respondent bank on the facts of this case. Since the respondent did not cross‑appeal with respect to the application of s. 20(5), the judgment of the Court of Appeal should stand as is.

Cases Cited

By Iacobucci J.

Distinguished: Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, 1982 CanLII 57 (SCC), [1982] 2 S.C.R. 488; disapproved: Toronto‑Dominion Bank v. Dauphin Plains Credit Union Ltd. (1992), 1992 CanLII 8544 (MB CA), 98 D.L.R. (4th) 736; referred to: Number 10 Management Ltd. v. Royal Bank of Canada (1976), 1976 CanLII 1200 (MB CA), 69 D.L.R. (3d) 99; Marfani & Co. v. Midland Bank, Ltd., [1968] 2 All E.R. 573; Jervis B. Webb Co. v. Bank of Nova Scotia (1965), 1965 CanLII 626 (ON SC), 49 D.L.R. (2d) 692; Ontario Woodsworth Memorial Foundation v. Grozbord, 1969 CanLII 14 (SCC), [1969] S.C.R. 622; Norwich Union Fire Insurance Society Ltd. v. Banque Canadienne Nationale, 1934 CanLII 39 (SCC), [1934] S.C.R. 596; Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., 1976 CanLII 192 (SCC), [1977] 2 S.C.R. 456; Bank of England v. Vagliano Brothers, [1891] A.C. 107; Gough Electric Ltd. v. Canadian Imperial Bank of Commerce (1986), 1986 CanLII 752 (BC CA), 34 B.L.R. 17; Royal Bank of Canada v. Wild (1974), 1974 CanLII 832 (ON CA), 51 D.L.R. (3d) 188.

By La Forest J. (dissenting on the appeal)

Bank of England v. Vagliano Brothers, [1891] A.C. 107; Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., 1976 CanLII 192 (SCC), [1977] 2 S.C.R. 456; Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, 1982 CanLII 57 (SCC), [1982] 2 S.C.R. 488; Vinden v. Hughes, [1905] 1 K.B. 795; Harley v. Bank of Toronto, 1938 CanLII 70 (ON CA), [1938] 2 D.L.R. 135; London Life Insurance Co. v. Molsons Bank (1904), 8 O.L.R. 238; Metropolitan Life Insurance Co. v. Quebec Bank (1916), 50 C.S. 214; Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd., 1979 CanLII 44 (SCC), [1979] 2 S.C.R. 787; Clutton v. George Attenborough & Son, [1897] A.C. 90; Grey v. Pearson (1857), 6 H.L.C. 60; Caledonian Railway Co. v. North British Railway Co. (1881), 6 App. Cas. 114.

Statutes and Regulations Cited

Bills of Exchange Act, R.S.C., 1985, c. B‑4, ss. 2 “bearer”, “delivery”, “endorsement”, “holder”, 20(2), (3), (4), (5), 38, 39(1)(a), (2), 48(1), (3), 49(1), 55(1), 59, 73, 165(3).

Bills of Exchange Act, 1882 (U.K.), 45 & 46 Vict., c. 61, s. 60.

Bills of Exchange Act, 1890, S.C. 1890, c. 33, s. 21.

Authors Cited

Canada. Law Reform Commission. The Cheque: Some Modernization. Ottawa: The Commission, 1979.

Crawford and Falconbridge, Banking and Bills of Exchange: A Treatise on the Law of Banks, Banking, Bills of Exchange and the Payment System in Canada, 8th ed. By Bradley Crawford. Toronto: Canada Law Book, 1986.

Dictionary of Canadian Law, 2nd ed. Scarborough, Ont.: Carswell, 1995, “drawer”.

Driedger, Elmer A. Construction of Statutes, 2nd ed. Toronto: Butterworths, 1983.

Falconbridge, John Delatre. Banking and Bills of Exchange, 6th ed. Toronto: Canada Law Book, 1956.

Geva, Benjamin. “The Fictitious Payee and Payroll Padding: Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd.” (1977‑78), 2 C.B.L.J. 418.

Martin, Sheilah L. “Section 165(3) of the Bills of Exchange Act” (1985-86), 11 C.B.L.J. 23.

Ogilvie, M. H. Canadian Banking Law. Scarborough, Ont.: Carswell, 1991.

Ogilvie, M. H. “Should the Collecting Banker Be the Drawer's Insurer?: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce” (1994), 9 B.F.L.R. 227.

Rafferty, Nicholas. “Forged Cheques: A Consideration of the Rights and Obligations of Banks and Their Customers” (1979‑80), 4 C.B.L.J. 208.

Scott, Stephen A. “The Bank is Always Right: Section 165(3) of the Bills of Exchange Act and its Curious Parliamentary History” (1973), 19 McGill L.J. 78.

APPEAL and CROSS‑APPEAL from a judgment of the British Columbia Court of Appeal (1994), 1994 CanLII 247 (BC CA), 99 B.C.L.R. (2d) 201, 120 D.L.R. (4th) 250, [1995] 2 W.W.R. 435, 52 B.C.A.C. 161, 86 W.A.C. 161, 19 B.L.R. (2d) 166, varying a judgment of the British Columbia Supreme Court (1993), 1993 CanLII 536 (BC SC), 81 B.C.L.R. (2d) 197, [1993] 7 W.W.R. 368, allowing the appellants’ action in damages. Appeal allowed, La Forest and McLachlin JJ. dissenting, and cross‑appeal dismissed.

Bruce B. Clark, for the appellants.

Keith E. W. Mitchell and H. Rhys Davies, for the respondent.

The judgment of Lamer C.J. and L’Heureux‑Dubé, Sopinka, Gonthier, Cory, Iacobucci and Major JJ. was delivered by

1. Iacobucci J. -- In the main, this appeal raises issues concerning the tort of conversion with respect to cheques, the meaning of fictitious or non-existing persons in s. 20(5) of the Bills of Exchange Act, R.S.C., 1985, c. B-4 (the "Act"), and the defence of a holder in due course under s. 165(3) of the Act.

I. Background

2. The appellants Boma Manufacturing Ltd. and Panabo Sales Ltd. are associated companies in the business of manufacturing and marketing small souvenir items. The only shareholders and officers of the companies are Boris Mange and Ursula Mange.

3. The appellants' bookkeeper Donna Alm committed fraud against the companies by way of issuing a long series of fraudulent cheques. These cheques were honoured by her bank, the respondent Canadian Imperial Bank of Commerce (“CIBC”) over the course of five years. The appellants brought an action in negligence, and in the alternative, conversion, against their bank, the Royal Bank of Canada, and against the respondent.

4. Donna Alm had been working for the appellants since 1967. Her responsibilities included preparing the payroll, handling accounts receivable and payable, preparing cheques and reconciling bank statements. She was never an officer, director or shareholder of the companies. She was, however, a duly authorized signing officer on the bank accounts maintained by the companies, along with Boris and Ursula Mange. Cheques drawn on these accounts required only one authorized signature. It was understood that Alm was to sign cheques only when the others were unavailable to do so, and only with respect to legitimate obligations of the companies.

5. Donna Alm's sole supervisor was Boris Mange. He would occasionally look at the cheque register and monthly bank statements. However, no routine, internal or independent audits were ever undertaken prior to discovery of the fraud.

6. Between 1982 and 1987, Donna Alm operated three bank accounts at a CIBC branch in North Vancouver, as follows:

(a)a chequing account in the name of Donna Alm's first husband, John R. Alm;

(b)a joint chequing account in the name of Donna and John R. Alm; after February 10, 1987, this account became a joint account for Donna Alm and her second husband Lou Hilford;

(c)a chequing account in the name of Donna Alm; this account also became joint with Lou Hilford after February 10, 1987.

7. Between December 8, 1982 and May 6, 1987, Alm used the appellants' pre-printed cheque forms to create some 155 cheques totalling $91,289.54, payable to a number of persons connected with the appellants, including Boris Mange, Ursula Mange, several employees, and one of the subcontractors, Van Sang Lam. The cheques payable to Lam were, with one exception, made to "J. Lam" or "J. R. Lam", the initials and the last name mimicking the name of Donna Alm's first husband. Alm signed 146 of the cheques on behalf of the appellants, and fraudulently obtained Boris Mange's signature on the other nine. Alm deposited all the cheques into one of her accounts at the CIBC.

8. The appellants had entered into a verification agreement with the Royal Bank in connection with their accounts, which excepted "any payments made on forged or unauthorized endorsements". The fraudulently negotiated cancelled cheques were sent to the appellants, and most of them were removed and destroyed by Alm. Her conduct was not discovered until May 11, 1987, through a new assistant bookkeeper. Alm was immediately dismissed.

9. In April 1988, written notice with respect to some $74,000 worth of cheques was given to the Royal Bank and to the CIBC. A complete listing of the fraudulent cheques was provided to the Royal Bank and the CIBC in May of 1989, following a police investigation.

10. The CIBC's policy with respect to a customer wishing to deposit a third party cheque to her account was to require that the cheque be endorsed by the payee. If there was no endorsement by the payee, the teller was to return the cheque to the customer. However, 107 of the cheques payable to "J. Lam" or "J. R. Lam" were accepted by the CIBC for deposit in one or the other of the three accounts without endorsement. The tellers apparently assumed that the payee was "J. Alm" or "J. R. Alm", Donna Alm’s first husband, and so accepted the cheques without endorsement, contrary to policy. Donna Alm was a longstanding customer of the CIBC branch in question, and was considered to be reliable. The tellers also assumed, given the large number of transactions involving the appellants' cheques signed by Donna Alm, that Donna Alm owned the appellant companies. Some of the Lam cheques, and all of the cheques payable to other third parties, bore the forged endorsement of the payee, the forgeries having been perpetrated by Donna Alm.

11. The appellants were successful at trial, and the Royal Bank was ordered to pay $5,390.12, and the CIBC was ordered to pay $91,289.54: (1993), 1993 CanLII 536 (BC SC), 81 B.C.L.R. (2d) 197, [1993] 7 W.W.R. 368. CIBC appealed the decision before a five-member panel. A majority of the Court of Appeal allowed the appeal, reducing the judgment so as to reflect only the amount of the nine cheques bearing Boris Mange's signature: (1994), 1994 CanLII 247 (BC CA), 99 B.C.L.R. (2d) 201, 120 D.L.R. (4th) 250, [1995] 2 W.W.R. 435, 52 B.C.A.C. 161, 86 W.A.C. 161, 19 B.L.R. (2d) 166. A minority of two would have also held the CIBC liable for the amount of the 103 cheques signed by Donna Alm that were not endorsed.

II. Relevant Statutory Provisions

12. Bills of Exchange Act, R.S.C., 1985, c. B-4

2.In this Act,

"bearer" means the person in possession of a bill or note that is payable to bearer;

"delivery" means transfer of possession, actual or constructive, from one person to another;

"endorsement" means an endorsement completed by delivery;

"holder" means the payee or endorsee of a bill or note who is in possession of it, or the bearer thereof;

20. . . .

(2)A negotiable bill may be payable either to order or to bearer.

(3) A bill is payable to bearer that is expressed to be so payable, or on which the only or last endorsement is an endorsement in blank.

(4) Where a bill is not payable to bearer, the payee must be named or otherwise indicated therein with reasonable certainty.

(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer.

39. (1) As between immediate parties and as regards a remote party, other than a holder in due course, the delivery of a bill

(a) in order to be effectual must be made either by or under the authority of the party drawing, accepting or endorsing, as the case may be. . . .

(2) Where the bill is in the hands of a holder in due course, a valid delivery of the bill by all parties prior to him, so as to make them liable to him, is conclusively presumed.

48. (1) Subject to this Act, where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.

49. (1) Where a bill bearing a forged or an unauthorized endorsement is paid in good faith and in the ordinary course of business by or on behalf of the drawee or acceptor, the person by whom or on whose behalf the payment is made has the right to recover the amount paid from the person to whom it was paid or from any endorser who has endorsed the bill subsequent to the forged or unauthorized endorsement if notice of the endorsement being a forged or an unauthorized endorsement is given to each such subsequent endorser within the time and in the manner mentioned in this section.

50. (1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely,

(a) that he became the holder of it before it was overdue and without notice that it had been previously dishonoured, if such was the fact; and

(b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

59. (1) A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill.

(2) A bill payable to bearer is negotiated by delivery.

(3) A bill payable to order is negotiated by the endorsement of the holder.

73. The rights and powers of the holder of a bill are as follows:

(a) he may sue on the bill in his own name;

(b) where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill;

(c) where his title is defective, if he negotiates the bill to a holder in due course, that holder obtains a good and complete title to the bill; and

(d) where his title is defective, if he obtains payment of the bill, the person who pays him in due course gets a valid discharge for the bill.

165. . . .

(3) Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.

III. Judgments Appealed From

A. British Columbia Supreme Court (1993), [1993 CanLII 536 (BC SC)](https://www.canlii.org/en/bc/bcsc/doc/1993/1993canlii536/1993canlii536.html), 81 B.C.L.R. (2d) 197

13. Macdonald J. first examined ss. 48(1), 48(3) and 49 of the Bills of Exchange Act. He noted that all the cheques involved in this case had been properly issued, as they had all been signed either by Alm or by Mange, both of whom were authorized signing officers.

14. After considering the claim against the Royal Bank (not in issue in the instant appeal), Macdonald J. turned to the claims against the CIBC. The appellants claimed in negligence, conversion, and under the provisions of the Act itself. The negligence claim was dismissed, Macdonald J. finding that the CIBC owed no duty of care to the appellants. He also stated that the negligent failure of the appellants to detect Alm's fraudulent conduct far outweighed any negligent conduct on the respondent's part.

15. Macdonald J. found the respondent to be prima facie liable for conversion. Accordingly, he considered whether any of the following defences raised by the respondent could defeat the conversion claim: (a) the "worthless paper" defence; (b) the s. 165(3) defence; (c) the "fictitious payee" defence; and (d) the "inadequate notice" defence.

16. With respect to the worthless paper defence, the trial judge noted that where the signature of the maker of the cheque is forged, the cheques are "worthless", and incapable of conversion. However, in this case, Donna Alm and Boris Mange were authorized signing officers. Accordingly, the cheques in question were not worthless paper.

17. With respect to the second defence, s. 165(3), Macdonald J. concluded as follows (at p. 207):

Where the endorsement is forged, or where the collecting bank neglects to require an endorsement by the payee and its own customer, that result would completely negative the effect of s. 48 of the Act. I accept the response of the [appellants] that "delivery" in s. 165(3) in these circumstances requires the authority of the drawer under s. 39(1)(a) of the Act, and that Donna Alm had no such authority. I reject the submission of C.I.B.C. that her authority to sign cheques on behalf of the [appellants] carried with it the authority to deliver the same. In my view, any such authority to deliver is limited to cheques properly drawn payable to creditors of the [appellants].

With regard to those cheques with forged endorsements, there can be no argument that Donna Alm had any authority from the named payees.

I reject the defence to conversion based on s. 165(3).

18. As a third defence, the CIBC submitted that the cheques in question had been made out to "fictitious payees", within the meaning of s. 20(5) of the Act. Accordingly, the respondent would be able to treat the cheques as payable to bearer, rather than payable to order, and negotiation of the cheques would not require endorsement, but only delivery. Macdonald J. found a complete answer to this issue in Number 10 Management Ltd. v. Royal Bank of Canada (1976), 1976 CanLII 1200 (MB CA), 69 D.L.R. (3d) 99, at p. 102, wherein the Manitoba Court of Appeal found that a collecting bank guarantees the endorsement of all properly issued bills of exchange, and that where the bank pays out money on a forged endorsement, the bank will be liable. Macdonald J. found this approach to be consistent with the scheme of the Act. He stated that as the drawer of a cheque owes no duty to its own bank to verify monthly statements, in the absence of a verification agreement, then it certainly cannot owe any such duty to a collecting bank. He also noted that under s. 48(1) of the Act, a forged endorsement is wholly inoperative and gives no right either to retain the bill or enforce payment thereof. Macdonald J. agreed with the appellants that the fictitious payee defence is largely irrelevant to an action against a collecting bank for conversion, because in his view (at p. 208):

... a bearer cheque can be converted by a person not authorized to deliver it. Where the C.I.B.C. can be regarded as an agent for its dishonest customer to collect, as would appear to be the case under its practice set out in the Agreed Statement of Facts, it is responsible to the drawer for her conversion.

He concluded that, even if the cheques in question were payable to "fictitious persons" within the meaning of s. 20(5), and the CIBC was entitled to treat them as bearer cheques, the cheques were not "delivered" or "negotiated" and the CIBC did not acquire title to them. Accordingly, the CIBC had no right to obtain payment for the cheques from the appellants' bank accounts.

19. With respect to the last defence raised, Macdonald J. was of the view that notice had been provided within a reasonable time in this case.

20. The trial judge ultimately concluded that it was on the third ground advanced by the appellants that the claim should succeed, that is, under s. 49(1) of the Act. Under this section, where a cheque bearing a forged endorsement is paid, there is a right of recovery against any subsequent endorser. In his view, this section makes the CIBC "the guarantor of the validity of the payee’s endorsement on the cheques in issue here" (p. 208), as stated in Number 10 Management. As for the cheques that were not endorsed, the trial judge stated that they had not been delivered within the meaning of s. 59(2). He also noted that the situation between the plaintiff and a collecting bank should be different from the situation between the plaintiff and its own bank (at pp. 208-9):

The drawee bank is entitled to rely upon a person whom the drawer has authorized to conduct banking business on its behalf. There is no such connection between the drawer and the collecting bank, which is dependent upon its own customer for protection.

The system requires the collecting bank to verify the endorsement ahead of its own, and it must rely on its own customer in that regard by ensuring that sufficient funds remain in the customer's account until the cheque has cleared or count on that customer to cover any cheque not honoured by the drawee bank.

For these reasons, the CIBC's negligence in failing to obtain an endorsement on the "Lam" cheques was a bar to the CIBC's reliance upon any estoppel arising from the negligence of the appellants.

21. The trial judge ordered judgment against the Royal Bank for $5,390.12, and judgment against the CIBC for the whole of the $91,289.54 claimed.

B. British Columbia Court of Appeal (1994), [1994 CanLII 247 (BC CA)](https://www.canlii.org/en/bc/bcca/doc/1994/1994canlii247/1994canlii247.html), 99 B.C.L.R. (2d) 201

1. Southin J.A. (for the majority)

22. Southin J.A. emphasized the following four facts, which in her view were critical to the resolution of the appeal: (1) the cheques involved were the drawers' cheques, rather than forgeries thereof; (2) Alm, the signatory of the 146 cheques, intended both to validate the cheques for the bank upon which they were drawn and to receive the proceeds; (3) Mange, the signatory of the nine cheques, intended to validate them for the Royal Bank, but did not intend that anyone other than the named payee should receive the proceeds; and (4), of the 155 cheques, 107 were collected by the CIBC, although they were payable to a third party and had not been endorsed.

23. Southin J.A. concluded that the crux of the action in conversion was that the recipient of the proceeds, Donna Alm, was not the person intended to receive the funds. In this regard, it was important to determine whether it was the company's or the signatory's intention that was of relevance. Southin J.A. concluded that Alm, an authorized signing agent, had the power to bind her principal, and accordingly, it was Alm's intention that should prevail. Consequently, Southin J.A. was of the view that the action in relation to the 146 cheques that Alm had signed could not succeed, as there had been no misdirection of these cheques; Alm intended all along that they be directed to herself. The action in conversion could only succeed with respect to the nine cheques that Mange had signed, as they had truly been diverted from their intended recipient.

24. With respect to the application of s. 20(5) to the nine cheques signed by Mange, Southin J.A. noted that whether someone is "fictitious or non-existing" within the meaning of s. 20(5) of the Act must "depend on the intention of the drawer of the cheque, not the intention of the person who fills in the cheque" (p. 217). The intention of the drawer in this case, that is, the appellants, was that the payees receive payment. Accordingly, the payees were not fictitious persons, and the cheques could not be treated as payable to bearer.

25. Southin J.A. rejected the s. 165(3) defence raised by the CIBC. She stated that she was not "persuaded that Parliament intended, by s. 165(3), to give a bank an independent title to a cheque payable to A and intended by the drawer to be paid to A which was deposited to the account of B without any endorsement by A or with an endorsement by A which is forged" (p. 218). Accordingly, Southin J.A. held that the appellants were entitled to recover from the CIBC on the nine cheques signed by Mange. The award given at trial was reduced to the amount of the nine cheques.

2. Hutcheon J.A. (dissenting in part)

26. Hutcheon J.A. agreed with Southin J.A.'s disposition, "save as to 103 of the 107 cheques on which there was no signature purporting to be an endorsement of the payee" (p. 220). In his view, the cheques accepted by the CIBC without any endorsement were patently irregular on their face. He stated that in order for the provisions of s. 20(5) to be of application, the person claiming to enforce payment of the cheque must be its lawful holder. A holder, pursuant to s. 2 of the Act, is "the payee or endorsee of a bill or note . . . or the bearer thereof", and a bearer is a "person in possession of a bill or note that is payable to bearer". He concluded as follows (at p. 222):

The Bank was neither the payee nor the endorsee of the cheques in question. Nor was it the person in possession of a cheque that was payable to bearer. All that s. 20(5) provides is that the cheque "may be treated as payable to bearer". On a strict construction of s. 20(5) that is different from a provision that the cheque is payable to bearer. No policy reason exists for extending s. 20(5) beyond its express letter to protect a collecting bank that received and paid the unendorsed cheques contrary to its own internal rules.

For these reasons, s. 20(5) cannot be invoked by the Bank to set up the defence to the claim of conversion that the Bank was justified in ignoring the existence of a named payee on the face of the cheques. With respect I do not think that it is any answer to say that if the Bank had not been internally careless Alm would simply have endorsed the cheques. I do not know what she would have done if she had been challenged.

I would therefore allow the appeal by varying the amount of the judgment to the amount of the nine cheques dealt with by Madam Justice Southin and of the 103 cheques dealt with in these reasons.

IV. Issues

A. On Appeal

27.1.Were the cheques in question made payable to fictitious or non-existing persons?

2.Were the cheques in question "delivered" to the CIBC?

3.Was the CIBC, as a "collecting" bank, prima facie liable to the appellants in conversion so that the cheques in question had to be properly negotiated to the CIBC in order for the CIBC to obtain title to those cheques and thereby escape liability?

4.Is the defence of contributory negligence available to the respondent?

B. On Cross-Appeal

28.1.What is the proper interpretation of s. 165(3), and in particular:

(a)Must the cheque be deposited to the credit of its payee for the subsection to apply?

(b)Must the cheque be endorsed before the bank can credit the person with the amount of the cheque?

(c)Must the cheque be delivered with the authority of the drawer or endorser, or does simply handing it to the bank teller for deposit suffice?

V. Analysis

29. I have found it helpful to consider this appeal in terms of three broad issues, as follows: the doctrine of conversion with respect to cheques; s. 20(5) as a defence to an action in conversion; and s. 165(3) as a defence to an action in conversion.

A. Conversion in relation to cheques

30. It is a commonly accepted proposition that a bill of exchange is a chattel that can be negotiated from party to party. An individual obtains title to a bill through negotiation. Once an individual has obtained title, that individual has the right to present the bill to the drawee for payment, as well as a right of recovery against the drawer if the bill is dishonoured by the drawee.

31. The tort of conversion involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner's right of possession. The tort is one of strict liability, and accordingly, it is no defence that the wrongful act was committed in all innocence. Diplock L.J. asserted this principle in Marfani & Co. v. Midland Bank, Ltd., [1968] 2 All E.R. 573, at pp. 577-78:

. . . the moral concept of fault in the sense of either knowledge by the doer of an act that is likely to cause injury, loss or damage to another, or lack of reasonable care to avoid causing injury, loss or damage to another, plays no part.

If the customer is not entitled to the cheque which he delivers to his banker for collection, the banker, however, innocent and careful he might have been, would at common law be liable to the true owner of the cheque for the amount of which he receives payment, either as damages for conversion or under the cognate cause of action, based historically on assumpsit, for money had and received.

32. The fact that liability for the tort of conversion is strict suggests that the respondent's submission that the appellants were contributorily negligent must fail. The matter was raised before the Court of Appeal, and was dismissed without reasons. While this argument would be available in an action for negligence, the notion of strict liability involved in an action for conversion is prima facie antithetical to the concept of contributory negligence.

33. It is true that the comments of Professor Ogilvie in Canadian Banking Law (1991), at pp. 593-94, provide some support for the respondent's position:

Contributory negligence would require courts to apportion liability in accordance with negligence as between the true owner and the bank in cases of conversion. The availability of contributory negligence as a defence in an action for conversion was originally doubtful because the defence was at first only thought to be available in actions for negligence. But in a 1950 decision from New Zealand, the defence was permitted where conversion was found [Helson v. McKensies (Cuba Street) Ltd., [1950] N.Z.L.R. 878 (C.A.)], and this approach was adopted in Lumsden & Co. v. London Trustee Savings Bank [[1971] 1 Lloyd's Rep. 114 (Ch. D.). See also: Southrada v. Bank of New South Wales, [1976] 2 Lloyd's Rep. 444 (P.C.)] by Donaldson J. who held that damages may be received where the plaintiff was also negligent.

. . .This decision has been doubted in Australia on the ground that the defence of contributory negligence is only available under the Act in situations where it could have been pleaded as a defence at common law, or in negligence cases only. In England, any doubts about the availability of contributory negligence as a defence were removed by section 47 of the Banking Act, 1979, which is one of the few sections of that Act still in force. In Canada, however, the situation is unknown. Most provinces have similar contributory negligence legislation to that in England and Australia, but there would appear to be no case law to date considering such a defence in an action against a collecting bank in conversion.

It is arguable that the defence of contributory negligence should be available. In most situations in which conversion occurs in relation to cheques, there are varying degrees of innocence and carelessness on both sides. It is more equitable to apportion liability in accordance with the actual facts as found by a court, than to expect banks to be the insurers of the "true owner" of a cheque whose carelessness has contributed to the conversion. As total insurers, banks would simply pass the costs on to all its customers, who played no role in the conversion whatsoever.

See also Professor Ogilvie's case comment, “Should the Collecting Banker Be the Drawer's Insurer?: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce” (1994), 9 B.F.L.R. 227, in which she expresses her view that this case should not be decided in reference to the Act, but rather on the common law tort of negligence, and that the courts should impose a duty of account verification on bank customers.

34. The respondent argues that it would have been easier for the appellants to detect the fraud than for the respondent: even if the unendorsed third party cheques had been questioned by the respondent, it is submitted that Alm would have forged the endorsements and continued with her scheme. In the respondent's view, the appellants should have at least adopted the "elementary precaution" of having someone else check the bank statements, or requiring a second signature on cheques, or having the books audited.

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 the 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.

36. The seminal discussion of conversion of cheques is found in Crawford and Falconbridge, Banking and Bills of Exchange (8th ed. 1986), vol. 2, at p. 1386:

Conversion is the remedy of the lawful possessor of chattels to have their value paid to him by a wrongful dispossessor. It is normally applied to goods and there might appear to be some difficulty in holding that a bank that has paid part of what it owes to a customer to some other person not entitled to receive it is guilty of a conversion of the customer's chattel. But any such apparent difficulty has been surmounted by treating the conversion as being of the instrument itself, that is, of the piece of paper in respect of which the payment is made. Similarly a bank that collects a sum of money under an instrument for a person not entitled to it is treated as having converted the instrument. It has been repeatedly held that a bank converts an instrument by dealing with it under the direction of one not authorized, either by collecting it or, semble (although this has not yet actually been decided) by paying it and in either case, making the proceeds available to someone other than the person rightfully entitled to possession.

37. The drawer, the payee or the endorsee can bring an action for conversion of a cheque. To make the claim for damages for conversion, the plaintiff must prove that he or she was either in actual possession or entitled to immediate possession of the chattel. As Rafferty states in “Forged Cheques: A Consideration of the Rights and Obligations of Banks and Their Customers” (1979-1980), 4 C.B.L.J. 208, at p. 228, "[t]he conversion action, however, will lie only if the drawer is still the true owner of the cheque. It must not have been issued to the payee" (Jervis B. Webb Co. v. Bank of Nova Scotia (1965), 1965 CanLII 626 (ON SC), 49 D.L.R. (2d) 692 (Ont. H.C.), and see for example Ontario Woodsworth Memorial Foundation v. Grozbord, 1969 CanLII 14 (SCC), [1969] S.C.R. 622). The defendant's liability extends to the face value of the converted instrument, and is not limited to the value of the instrument as paper and ink (Norwich Union Fire Insurance Society Ltd. v. Banque Canadienne Nationale, 1934 CanLII 39 (SCC), [1934] S.C.R. 596).

38. In this case, it is common ground that the payees of the cheques in question had no right of possession to the cheques, as they were not created in respect of legitimate debts owed to them by the appellants. It is also agreed that Alm had no right to immediate possession of the cheques. However, it remains to be determined whether the respondent may have had a right of possession over and against the appellants; this issue will be canvassed below, in the context of fictitious or non-existing persons under s. 20(5) of the Act.

39. The respondent agrees that in this case, it is prima facie liable to the drawer for conversion. The trial judge, in finding the respondent liable for conversion, correctly affirmed, in my view, that where a collecting bank pays out on a forged endorsement, the collecting bank will be liable for conversion. The Court of Appeal, by contrast, found that the action in conversion must fail with respect to the 146 cheques signed by Alm, for the reason that Alm had authority to sign the cheques as well as to deliver them. Further, the Court of Appeal found significance in the fact that Alm fully intended to receive the proceeds herself. Accordingly, in the majority's view, the payment was not diverted from its intended recipient.

40. In my view, the Court of Appeal's approach, with respect, misses the point. It is the intention of the drawer, not the signatory of the cheque, that is relevant, as will be discussed in greater detail below. Alm is not the drawer because she cannot be said to be the directing mind of the corporate appellants; she simply had signing authority within limited circumstances. The relevant intention in this case is that of the drawer, the appellant companies. In the absence of Alm's fraud, they would have been liable, not Alm, if the cheques had been validly issued and were subsequently dishonoured by the drawee.

41. The money on deposit in the appellants' Royal Bank accounts was owed to the lawful holder of those accounts, the appellants. Through the CIBC's actions, money owed to the appellants was paid to Alm, who was not entitled to the money. She was not a payee, and none of the cheques was endorsed by any of the named payees. The forged endorsements were "wholly inoperative" pursuant to s. 48 of the Act. The CIBC presented fraudulent cheques for payment to the Royal Bank, and collected the proceeds therefrom. The CIBC then accounted for the proceeds to Ms. Alm, one not “rightfully entitled" to the funds. Thus, the CIBC is prima facie liable in conversion to the appellants. However, it remains to be seen whether the CIBC can avail itself of a defence.

B. Unauthorized signatures and the fictitious payee defence

42. As noted above, Alm created some 155 cheques payable to a number of persons connected with the appellants. One hundred and seven of the cheques were payable to "J. Lam" or "J. R. Lam", and were accepted for deposit without endorsement. The remaining Lam cheques, and all of the cheques payable to other third parties, bore the forged endorsement of the payee, the forgeries having been perpetrated by Donna Alm.

43. I note in passing that in this case, we are not within the realm of Number 10 Management, supra, where the Manitoba Court of Appeal held that a cheque with a forged signature is not a bill of exchange. In this case, the cheques were signed by authorized signatories, albeit for non-existent obligations, and were bills of exchange.

44. As Professor Benjamin Geva notes in his commentary, “The Fictitious Payee and Payroll Padding: Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd.” (1977-78), 2 C.B.L.J. 418, the general rule with respect to a forged or an unauthorized signature on a bill is contained in s. 48(1) (formerly s. 49(1)) of the Act. Such a signature is "wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature". As Geva states at pp. 418-19, "the effect of this section is to force a bank that has paid a cheque and debited the account of the drawee, based on a forged or unauthorized endorsement, to re-credit the account and to bear the loss".

45. An exception to this rule is set out in s. 20(5) of the Act, the fictitious payee provision. The section provides that, where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. The significance of a cheque that is payable to bearer, rather than to order, is that it can be negotiated by simple "delivery" to the bank; endorsement is not required. The presence or absence of a legitimate or forged endorsement is irrelevant to a bearer cheque. A bank becomes the lawful holder of a bearer cheque simply through delivery. By contrast, in order for a bank to become the lawful holder of a cheque that is payable to order, not only must the cheque be delivered to effect negotiation, but the cheque must also be endorsed. If the cheques in question were payable to fictitious persons, and could accordingly be treated as bearer cheques, the bank would become a "holder in due course" pursuant to s. 73 of the Act despite the forged endorsements and the missing endorsements; to repeat, negotiation of a bearer cheque is achieved simply by delivery. In this way, an exception to the usual rule of nemo dat quod non habet is created. Through the fictitious payee defence, the loss, as Geva states at p. 419, "is thrown upon the drawer". (See also Rafferty, supra, at pp. 210-11.)

46. Falconbridge, in Banking and Bills of Exchange (6th ed. 1956), put forward the following four propositions with respect to fictitious payees (at pp. 468-69):

Whether a named payee is non-existing is a simple question of fact, not depending on anyone's intention. The question whether the payee is fictitious depends upon the intention of the creator of the instrument, that is, the drawer of a bill or cheque or the maker of a note.

In the case of a bill drawn by Adam Bede upon John Alden payable to Martin Chuzzlewit, the payee may or may not be fictitious or non-existing according to the circumstances:

(1) If Martin Chuzzlewit is not the name of any real person known to Bede, but is merely that of a creature of the imagination, the payee is non‑existing, and is probably also fictitious.

(2) If Bede for some purpose of his own inserts as payee the name of Martin Chuzzlewit, a real person who was known to him but whom he knows to be dead, the payee is non-existing, but is not fictitious.

(3) If Martin Chuzzlewit is the name of a real person known to Bede, but Bede names him as payee by way of pretence, not intending that he should receive payment, the payee is fictitious, but is not non-existing.

(4) If Martin Chuzzlewit is the name of a real person, intended by Bede to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that Bede has been induced to draw the bill by the fraud of some other person who has falsely represented to Bede that there is a transaction in respect of which Chuzzlewit is entitled to the sum mentioned in the bill.

The policy underlying the fictitious person rule seems to be that if a drawer has drawn a cheque payable to order, not intending that the payee receive payment, the drawer loses, by his or her conduct, the right to the protections afforded to a bill payable to order.

47. The fictitious payee rule was considered by this Court in Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., 1976 CanLII 192 (SCC), [1977] 2 S.C.R. 456, and in Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, 1982 CanLII 57 (SCC), [1982] 2 S.C.R. 488. In Concrete Column Clamps, a payroll clerk perpetrated a fraud by including among the cheques presented to the authorized signing officer of the company a number of cheques payable to persons who were not owed any wages, some being former employees and the others having names which may or may not have been those of existing persons. The fraudulent employee took the cheques and received the amounts on forged endorsements. With regard to the named payees who were not former employees, it was held both by the trial judge and the Court of Appeal that they were "non-existing", and so fell within the s. 21(5) (now s. 20(5)). No issue in this respect was raised on appeal to the Supreme Court. With respect to the cheques made payable to former employees, both the trial judge and the Court of Appeal applied the fourth proposition put forward by Falconbridge, namely, that:

If Martin Chuzzlewit is the name of a real person, intended by Bede to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that Bede has been induced to draw the bill by the fraud of some other person who has falsely represented to Bede that there is a transaction in respect of which Chuzzlewit is entitled to the sum mentioned in the bill.

48. The majority of the Court in Concrete Column Clamps, supra, agreed that the fourth proposition was of application, and noted that a considerable line of Canadian and English authority had adopted the same approach in similar circumstances. The appellant in that case had suggested that where the person authorized to sign the cheques did so mechanically, without knowing any of the payees personally, it was not possible to apply the same rule as when a cheque is signed relying on an explicit false declaration. However, Pigeon J. for the majority commented as follows (at p. 484):

On the contrary, in an age when cheques are processed by computer, it is even more necessary to avoid facilitating fraudulent operations.

By making banks responsible for cheques cashed on a false endorsement, our Bills of Exchange Act certainly has the effect of making it more difficult to cash a cheque fraudulently. It is common knowledge that as a result, public agencies and private enterprises rely heavily on the responsibility of those who pay the cheques they issue, to counteract all kinds of fraud and at the same time to protect those for whom the payments are intended. The argument of counsel for the appellant, based on references to legislation in other countries relieving banks of this responsibility, is unconvincing. It is not for this Court to judge the results of such legislation, no attempt was even made to show that they were favourable. If appellant believes they were, it is to Parliament that it should apply to have the Bills of Exchange Act amended. I can see no justification for changing the interpretation of this Act, because a different rule has been established by legislation elsewhere.

It is to be noted that in the United Kingdom the drawee bank which pays cheques in good faith but on forged endorsements is protected by s. 60 of its Bills of Exchange Act, 1882, (U.K.), 45 & 46 Vict., c. 61, which has no parallel in Canada.

49. Laskin C.J. took a view different from that of the majority. In his opinion, the intention of the dishonest clerk should be attributed to the drawer/employer. In this way, he concluded that the named former employees were fictitious persons. The Chief Justice considered principles of agency law and vicarious liability (at pp. 480-81):

There is a fine line, too fine in my opinion, between the case where the authorized signer of a cheque perpetrates a payroll fraud and the case where the fraud is perpetrated by a payroll clerk upon whose integrity the authorized signer generally must rely in making out the payroll cheques. The Restatement of Agency Second (1958) accepts this distinction, holding that a drawee bank which acts in good faith is protected in the first situation and liable to suffer the loss in the second situation: see s. 173, Comment b; s. 280, Comment b. The Reporter's notes to s. 280 point out, inter alia, that "imputing knowledge to the principal is a fictitious way of stating that the principal is liable for the conduct of the agent, and the fiction should be used only where it would be equitable to do so" (at p. 482 of Restatement of Agency Second, Appendix).

The distinction taken in the Restatement of Agency Second appears to be based on a line of cases different from the line that led to the development of the present law on vicarious liability in tort. That line is concerned with the question of how far notice to or knowledge of an agent of facts relating to a transaction which he is carrying out for the principal will be imputed to the latter. The general rule of imputation on such a case (and I state the matter broadly without the distinctions thrown up by the cases: see Powell, Agency (2nd ed. 1961) at pp. 236 ff.) has been held to be subject to an exception where the agent for his own purposes engages in a fraud against the principal: see, for example, Bowstead, Agency (13th ed. 1968), at pp. 356-57; Corporation Agencies Ltd. v. Home Bank of Canada [1925 CanLII 40 (SCC), [1925] S.C.R. 706], at p. 718. I do not think that this line of cases, concerned as they are with what a third party communicates to an agent and vice versa, or with what an agent knows or should know when acting for a principal, are applicable here. It seems to me that the tort cases offer a better analogy by posing the question as to when an employee's or an agent's interest adverse to the employer or principal takes him outside of the scope of his employment.

Laskin C.J. concluded that it would be more equitable for the drawer/employer to bear the loss, given that the drawee bank had not been negligent in any way. In his view, there was no basis for a distinction between cheques payable to imaginary persons or persons who were not former employees and those who were formerly employees. For a view in support of this position, see Geva's commentary, supra.

50. In Fok Cheong, supra, the president of the appellant company drew a cheque upon the company's account payable to one Looing Weir, one of the company's creditors. The president fraudulently endorsed Weir's name, and received the proceeds. It was found that the cheque was never intended by the drawer to be paid to the payee. The appellant contended that as the payee was a real person to whom the appellant company was indeed indebted, the payee could not be characterized as a fictitious or non-existing person. However, Ritchie J., writing for the Court, concluded as follows (at p. 490):

It is obvious that the question of whether or not the payee is to be treated as a fictitious person lies at the very heart of this appeal and in my opinion this is to be determined in accordance with the reasoning expressed by Lord Herschell in Bank of England v. Vagliano Brothers, [1891] A.C. 107 at p. 153 where he said:

For the reasons with which I have troubled your Lordships at some length, I have arrived at the conclusion that, whenever the name inserted as that of the payee is so inserted by way of pretence merely, without any intention that payment shall only be made in conformity therewith, the payee is a fictitious person within the meaning of the statute, whether the name be that of an existing person, or of one who has no existence, and that the bill may, in each case, be treated by a lawful holder as payable to bearer.

In my opinion this passage accurately expresses the effect of the accepted authorities and I agree with the Court of Appeal that the finding of fraudulent intent on the part of Chan in drawing the instrument in question makes the payee of this cheque a fictitious person within the meaning of the authorities, (see also the third illustration cited in Falconbridge on Banking and Bills of Exchange, 7th ed., 1969, at p. 486), and the bank was accordingly entitled to treat the cheque as payable to bearer and therefore to treat it as chargeable against the account of the appellant.

51. The appellants in the instant appeal submitted at the outset that the fictitious payee defence should not be available to collecting banks. The appellants argued that unlike a drawee bank, a collecting bank places no reliance on and has no knowledge of the drawer. The collecting bank relies solely upon the creditworthiness of its own customer. The respondent, however, points out that there is no support for this proposition in the Act, in the case law, or in the academic texts. The respondent notes that when the intention of the Act is that it should apply only to a particular class, this intention is made express, citing for example s. 39 of the Act, dealing with delivery of a bill.

52. I agree with the respondent that there is no precedent for holding that s. 20(5) is not available to a collecting bank. In any event, the appellants agreed in reply that rather than taking the position that the fictitious person defence does not apply to collecting banks, the better argument was that there is a distinction between cases where the cheque is slipped in front of a signing officer, and a situation where the dishonest person is the signing officer.

53. In the instant appeal, the appellants submit that the facts fall within the fourth proposition set forth by Falconbridge, supra, as adopted by this Court in Concrete Column Clamps, supra. By contrast, the respondent submits that the circumstances of this case fall within the third proposition. The key issue is whether the drawer intended the payees to receive payment, which itself raises the question of who the drawer is. Can Donna Alm's intention be imputed to the appellants?

54. Many of the cheques in question were payable to "real" persons, albeit persons to whom no money was owed by the companies. Donna Alm, the writer of the cheques, did not intend for these payees to receive the proceeds of the cheques. This led the Court of Appeal to conclude that the drawer of the cheques intended them to be payable to bearer, based on the third proposition set out above, which was first stated in Bank of England v. Vagliano Brothers, [1891] A.C. 107 (H.L.), at p. 153, as follows, and adopted by this Court in Fok Cheong, supra, at p. 490:

For the reasons with which I have troubled your Lordships at some length, I have arrived at the conclusion that, whenever the name inserted as that of the payee is so inserted by way of pretence merely, without any intention that payment shall only be made in conformity therewith, the payee is a fictitious person within the meaning of the statute, whether the name be that of an existing person, or of one who has no existence, and that the bill may, in each case, be treated by a lawful holder as payable to bearer.

55. With respect, it seems to me that the Court of Appeal erred in focusing on Alm's intention. It is the intention of the drawer that is significant for the purpose of s. 20(5), not the intention of the signatory of the cheque. While a "drawer" is often defined to mean "[t]he person who signs or makes a bill of exchange" (cf. The Dictionary of Canadian Law (2nd ed. 1995)), in my view, it is important in the circumstances of this case to distinguish between the signatory and the drawer. The drawer, in this case, is the entity out of whose bank account the cheques were drawn, that is, the appellant companies. Alm was not the drawer, but was simply the signatory. Thus, it is the intention of the appellant companies, as the drawer, that must be determined. In my view, it is wrong to conclude that Alm, as an authorized signing officer of the appellants, could somehow be taken as expressing the intention of the appellant drawer.

56. Accordingly, the instant appeal is to be distinguished from the situation in Fok Cheong, supra. In that case, the drawer of the cheques was a company, and the signatory of the cheques was the president of that company. The actions of the signatory, who was the president and the guiding mind of the company, could be taken to express the intention of the drawer company itself. This is not the case before us now. There is no basis for holding that the intentions of the signatory Donna Alm could be imputed to the appellant companies. The only directors, officers and shareholders of the appellants were Boris Mange and Ursula Mange. Alm was authorized to sign cheques for the appellants only for the purpose of discharging lawful obligations of the appellants, and only when the Manges were not available.

57. The validity of the cheques is not challenged; therefore, it must be presumed that the drawer intended the payees to receive the proceeds of the cheques. Clearly, the appellants had no intention of transferring over $90,000 to Alm, rather than the payees, for no reason and via the circuitous route of third party cheques.

58. The respondent submits that the decision of this Court in Concrete Column Clamps, supra, should be overruled, and the approach taken by Laskin C.J. in dissent adopted. As I noted above, Laskin C.J. would have imputed the fraudulent intention of the employee to the employer/drawer. However, in my view, it is neither necessary nor desirable to import notions of agency and vicarious liability into the analysis. As I understand the applicable provisions of the Act, they do not invite the courts to consider whether the drawer, as principal, is vicariously liable for the acts of the agent. To my mind, it is quite evident that it is the intention of the drawer, in the sense of the entity from whose account the cheques will be drawn, that is of relevance. In some cases, it may be that the signatory is effectively also the drawer. But in this case, however, this is not so.

59. Pursuant to Concrete Column Clamps, supra, and the fourth proposition put forward by Falconbridge, supra, where a drawer is fraudulently induced by another person into issuing a cheque for the benefit of a real person to whom no obligation is owed, the cheque is to be considered payable to the payee, and not to a fictitious person. Such cheques will, accordingly, still be considered payable to order rather than to bearer. In this case, as in Concrete Column Clamps, supra, the drawer was fraudulently induced by an employee into issuing cheques for the benefit of real persons to whom no obligation was owed. In this case, then, the cheques payable to actual persons associated with the appellants were not payable to fictitious persons, and could not be treated by the CIBC as payable to bearer.

60. Many of the cheques, however, were made payable not to actual persons associated with the companies, but to "J. Lam" and "J. R. Lam". The appellants had no dealings with any persons of such names. According to the criteria set out in Falconbridge, supra, such a person would be categorized as "non-existing", and hence, fictitious. But in my view, it seems that Boris Mange was reasonably mistaken in thinking that "J. Lam" or "J. R. Lam" was an individual associated with his companies. Mange knew that one of the subcontractors retained by the companies was a "Mr. Lam". He did not specifically recall Lam's first name, which, incidentally, was Van Sang. However, when Mange approved the cheques to "J. Lam" and "J. R. Lam", he honestly believed that the cheques were being made out for an existing obligation to a real person known to the companies. The trial judge's comments in this regard were tantamount to a finding of fact, and were not disturbed on appeal; as these are concurrent findings of fact, this Court should not intervene.

61. Accordingly, the cheques made out to "J. Lam" and "J. R. Lam" also fall within the fourth category, and could not be treated by the CIBC as payable to bearer. Rather, the cheques were payable to order, and in order to be negotiable to the bank, delivery alone was not sufficient. Valid, non-forged endorsements were required.

62. The appellants also submitted that, even if the cheques in question could be considered to be payable to bearer (which, as I have stated, they cannot be), the cheques should not be considered to have been "delivered" within the meaning of the Act. Accordingly, they could not have been negotiated. Upon closer scrutiny, this submission relied upon a rather tortured reading of the Act, which I should like to address.

63. Section 2 of the Act states that "delivery" means transfer of possession, actual or constructive, from one person to another. Delivery, within the meaning of this section, was certainly effected in this case with respect to all the cheques in question, as Donna Alm transferred possession of them to the CIBC.

64. The appellants, however, submit that a cheque is not delivered by the mere handing of the cheque to a bank teller, but that the transfer of possession is merely part of a legal process, relying on Gough Electric Ltd. v. Canadian Imperial Bank of Commerce (1986), 1986 CanLII 752 (BC CA), 34 B.L.R. 17 (B.C.C.A.). According to the court in Gough, the delivery must be made by the authority of the drawer or the acceptor or the endorsee, as the case may be, referring to the language set out in s. 39 of the Act.

65. I agree with the respondent's submission that it is incorrect to read s. 39 as if it defined "delivery" for all sections of the Act. The language of s. 39 necessarily refers back to the provisions of s. 38. Parliament has defined the term "delivery" in the interpretation section of the statute, a definition that is presumably to apply throughout the statute. In defining the term "delivery" differently in the later section, the clear inference is that this special definition is not intended to apply throughout the statute, but only in the circumstances contemplated by s. 38 because s. 39 cannot be read in isolation from s. 38. Where the delivery is taking place for the purposes of s. 38, there must be more than the transfer of possession, actual or constructive, from one person to another; it must also be made either by or under the authority of the party drawing, accepting or endorsing, as the case may be. Section 39 deals with the completion of a contract on a bill, not the delivery of every bill of exchange for simple deposit or negotiation. As further support for this interpretation, I note that the first incarnation of the Act incorporated the present ss. 38 and 39 in one section (see S.C. 1890, c. 33, s. 21).

66. If s. 39 applied beyond the situations encompassed in s. 38, s. 2 would be rendered meaningless, as delivery would never mean the simple transfer of possession. Such a result would be an absurdity. It is true that the Manitoba Court of Appeal has held that "delivery" must always be more than mere transfer of possession, in Toronto-Dominion Bank v. Dauphin Plains Credit Union Ltd. (1992), 1992 CanLII 8544 (MB CA), 98 D.L.R. (4th) 736. I expressly disagree with this approach, however, as it renders s. 2 meaningless, and also essentially renders s. 20(5) nugatory. It must be remembered that a cheque payable to bearer, including a cheque payable to a fictitious person, is negotiated by simple delivery (s. 59(2)). To adopt the s. 39 definition of delivery for all purposes would mean that something more than simple delivery would be required, contrary to the very intent of s. 20(5) and s. 59(2). This result defies the maxim ut res magis valeat quam pereat, "it is better for a thing to go well than to come to nothing", that is, legislation should be interpreted to give it effect, rather than to render it a nullity.

67. For these reasons, it is my conclusion that the cheques in question certainly were "delivered" by Alm to the CIBC within the meaning of s. 2 of the Act. However, the cheques were not bearer cheques, but were payable to order. Accordingly, for negotiation to be effected, endorsement by the payee was required in order for the CIBC to acquire valid title to the cheques.

68. It remains to be seen, however, whether s. 165(3) of the Act is of application in this situation so as to give the CIBC the rights of a holder in due course, including immunity against a claim in conversion.

C. Section 165(3)

69. It should be noted at the outset that the CIBC in this case cannot be an actual holder in due course under the Act, because it is not a valid "holder" of the cheques in question. A bill must be negotiated to an individual in order for him or her to be a holder. As set out above, the cheques in this case were not validly negotiated, since they were payable to order, and bore no endorsement, or bore forged endorsements which amounted to a nullity under s. 48 of the Act.

70. However, it is argued that the CIBC acquired the rights of a holder in due course pursuant to s. 165(3), which provides that:

Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.

71. At this point, it should be noted that this section has attracted considerable commentary; see, for example, Professor Sheilah Martin's article “Section 165(3) of the Bills of Exchange Act” (1985), 11 C.B.L.J. 23, and Professor Stephen A. Scott's article “The Bank is Always Right: Section 165(3) of the Bills of Exchange Act and its Curious Parliamentary History” (1973), 19 McGill L.J. 78.

72. Section 165(3) was introduced in 1966; Professor Martin summarizes the subsequent reaction to the new provision as highly critical by giving too wide a protection to banks (at p. 23). She describes the significant advantage that the section affords to a depositing bank as follows, at p. 47:

While some innovations have been made, in the case of a good faith requirement and the deposit proviso, most cases have technically applied s. 165(3) to give the bank the wide protection it promotes. When one realizes that s. 165(3) is now being used as a defence to common law actions and that the bank remains free to pursue the drawer or endorsers at its option and regardless of its relationship with the endorser, it is easy to understand the fear that the section has done much to strengthen the legal position of a depositing bank.

Professor Martin explores in her article whether the breadth of s. 165(3) can be narrowed by strictly construing its threshold requirements but concludes that it would be difficult to narrow the scope of the subsection.

73. Professor Scott goes so far as to state that s. 165(3) "must be summarily repealed", as "[i]ts continued presence on the Canadian statute book is completely unjustified" (p. 97). In his view, it would not be necessary to replace the section with a new provision, but he suggests specific changes (at p. 97).

74. The respondent submits that, within the plain meaning of s. 165(3), it has acquired the rights of a holder in due course, since the cheques in question were indeed "delivered to a bank for deposit to the credit of a person", and since the CIBC credited the person "with the amount of the cheque". At first blush, this interpretation seems to be attractive. However, the consequence of this approach would be far-reaching and overly broad.

75. If the respondent's interpretation were adopted, a bank would never need to require an endorsement, and the distinction between cheques payable to order and payable to bearer would be insignificant. A bank would always be immune from the consequences of having accepted unendorsed cheques into third party accounts. This result cannot be supported.

76. In my view, the "person" in s. 165(3) must mean a person who is entitled to the cheque. This means that only the payee or the legitimate endorsee of the payee would qualify as a "person" for the purposes of s. 165(3). The purpose of s. 165(3), in my view, is to deal with, among others, situations like the one that arose in Royal Bank of Canada v. Wild (1974), 1974 CanLII 832 (ON CA), 51 D.L.R. (3d) 188 (Ont. C.A.), that is, where a payee deposits a cheque to his or her own account without endorsement, and to deal with restrictive endorsements. In that case, a cheque drawn by Wild and payable to Interlocking Building Systems Limited was delivered to the bank by the payee, to be deposited to the credit of his account. The words "for deposit only to the credit of Interlocking Building Systems Limited, dealer's account" were typed on the back of the cheque. There was no actual signature by way of endorsement on the cheque. The cheque was credited to the payee's account. When the cheque was presented by the collecting bank to the drawee, it was dishonoured, and charged back to the account of the payee. However, the funds in the payee's account were insufficient, there being an overdraft of $1,550. Several months later, the collecting bank demanded payment from the drawer of the cheque, Wild. The defendant conceded that the collecting bank had acquired the rights of a holder in due course by virtue of s. 165(3) of the Act.

77. In Wild, the bank, but for s. 165(3), could not have taken title to the cheque, since a cheque that is payable to order must be endorsed to be negotiated (s. 59(3)). The bank could not then be a holder in due course, and would be exposed to any equities between the payee and the drawer of the cheque. Section 165(3) remedies this situation. As long as a payee or endorsee is entitled to the proceeds of the cheque, the cheque can be deposited without endorsement without harming the position of the bank.

78. Section 165(3) represents a policy decision with respect to the allocation of risk. When a collecting bank is presented with a cheque for deposit to the credit of the payee, the bank is entitled, essentially, to assume that it was truly the intention of the drawer that the payee receive the proceeds of the cheque. It is more difficult for a fraudulent employee to manage to have cheques wrongfully made out in their own name; the likelihood with respect to cheques presented by the payee is that they are genuine. Accordingly, a policy decision has been made to overlook the lack of endorsement with respect to these cheques, to prevent the bank from being exposed to personal defences and defects in title should the cheque be dishonoured. The collecting bank is permitted to overlook endorsement with respect to these cheques, because it is very likely that they are indeed genuine.

79. However, the likelihood of fraud is dramatically higher when a person presents a third party cheque, particularly when it bears no endorsement. A collecting bank is not permitted to assume that the transaction is genuine in the face of circumstances that are so clearly prone to fraud. This is why the collecting bank is required, in the case of third party cheques, to ensure that they have been endorsed. It should be remembered that it was the respondent's own internal policy that third party cheques were not to be accepted without endorsement.

80. To some, the allocation of risk in the bills of exchange system may seem arbitrary, but in my view a necessary and coherent rationale sustains this allocation. With respect to forged endorsements, for example, no party in particular is in any better position to detect the fraud than any other. It is a risk that all parties must bear, including collecting banks. It is a price that must be paid if one wishes to enjoy the significant benefits of the bills of exchange scheme, not the least of which is, from the bank's perspective, the facilitation of huge numbers of financial dealings conducted rapidly, and without overwhelming transaction costs. While the banks are accorded the important advantage of holder in due course status in many situations, it would not be appropriate, as the respondent would have it, to exempt any party, including collecting banks, from all exposure to the risk and consequence of fraud.

81. In my view, s. 165(3) does not apply to the facts of this case. Alm was not the payee or a legitimate endorsee of the cheques in question. Accordingly, she was not a "person" within the meaning of s. 165(3). Absent valid endorsements, the cheques were not validly negotiated to the bank. As a result, CIBC took the cheques subject to the equities of the situation. Alm was not entitled to the cheques, but CIBC credited her with the amount of those cheques. This constitutes conversion, for which CIBC is strictly liable.

VI. Conclusions and Disposition

82. A bill of exchange is a chattel that can be negotiated from party to party. Title to a bill, such as a cheque, is obtained through negotiation. Once an individual has obtained title, that individual has the right to present the bill to the drawee for payment, as well as a right of recovery against the drawer if the bill is dishonoured by the drawee.

83. A bank converts an instrument, including a cheque, by dealing with it under the direction of one not authorized, by collecting it and making the proceeds available to someone other than the person rightfully entitled to possession. It should be noted that the tort of conversion is one of strict liability.

84. The respondent has agreed that it is prima facie liable to the drawer for conversion, and focuses instead on possible defences. I have concluded that the Court of Appeal was in error in holding that the action for conversion must fail with respect to the 146 cheques signed by Alm, having focused incorrectly on the intention of Alm, rather than the intention of the drawer. The respondent is indeed prima facie liable for conversion with respect to all of the cheques in question.

85. It is my further conclusion that s. 20(5) offers no defence to the respondent in the circumstances of this case. None of the cheques in question was payable to a fictitious person, in my view. Again, it is the intention of the drawer, in the sense of the one from whose account the cheques are drawn, that is of relevance, rather than the intention of the signatory. The drawer and the signatory may be one and the same in some instances, but this is not the situation in the instant appeal. As none of the cheques was payable to a fictitious person, the cheques could not be treated as payable to bearer by the CIBC. Accordingly, in order to be negotiated, the cheques had to be validly endorsed as well as delivered.

86. I have also concluded that the CIBC did not acquire the rights of a holder in due course pursuant to s. 165(3), for the reason that the person to whose account the cheques were deposited was not a legitimate payee or endorsee, but a third party. Absent valid endorsements, Alm could not validly negotiate the cheques to the bank. As a result, the CIBC took the cheques subject to the equities of the situation, and is liable for conversion with respect to those cheques.

87. Accordingly, I would allow the appeal with costs throughout, dismiss the cross-appeal with costs, set aside the judgment of the Court of Appeal, and restore the trial judgment against the CIBC for the full amount of the cheques in question, that is $91,289.54 plus interest.

The reasons of La Forest and McLachlin JJ. were delivered by

88. La Forest J. (dissenting on the appeal) -- I have had the advantage of reading the reasons of my colleague, Justice Iacobucci, but, with respect, I am unable to agree with the result he has arrived at and with much of his reasoning. While we are at one in concluding that, absent any applicable defences, the respondent bank is liable to the appellants for conversion, our paths diverge as regards the application of one of those defences. As I see it, s. 20(5) of the Bills of Exchange Act, R.S.C., 1985, c. B-4 (the “Act”), provides a defence to the respondent for all but $1,655.17 of the total amount claimed by the appellants. However, for somewhat different reasons, I agree with the interpretation of s. 165(3) arrived at by my colleague and that it is not available to the respondent on the facts of this case.

89. My colleague has summarized the facts and the judicial history of the case. I find it unnecessary to repeat the latter, but I do feel it is necessary to briefly review the facts. The appellants, Boma Manufacturing Ltd. and Panabo Sales Ltd., are two small, family-owned, manufacturing companies whose only shareholders and officers are Boris Mange and his wife Ursula Mange. From 1967 to 1987 the appellants employed a bookkeeper, Donna Alm, who, along with Boris and Ursula Mange, was an authorized signing officer for both companies with respect to the appellants’ accounts at the Royal Bank of Canada. Cheques drawn on these accounts required the signature of only one authorized signing officer. Over a five-year period, from 1982 to 1987, Ms. Alm defrauded the appellants of $91,289.54 by issuing and depositing to her own accounts with the respondent a total of 155 cheques drawn on the account of the appellants and fraudulently made out to third parties. Of the 155 cheques, 146 were signed personally by Ms. Alm in her capacity as signing officer; the remaining nine were prepared by Ms. Alm but signed by the president of the appellants, Boris Mange. The cheques were presented for deposit by Ms. Alm at her regular branch of the respondent CIBC. Ms. Alm had forged endorsements on some of the cheques but not on others. In any event, all of the cheques were accepted by the bank and Ms. Alm was credited with the face amount in each case.

90. In addition to grouping the 155 cheques depending on who signed them, it is also possible to group the cheques depending on the nature of the payee. Forty-one of the cheques were made out to existing employees of the appellants, including 34 which were variously made out to Boris Mange, Ursula Mange, and their son Michael Mange. Of the 41 cheques made out to existing employees of the appellants, 38 were signed by Ms. Alm herself and three by Boris Mange. The remaining 114 cheques were variously made out to “J. Lam”, “J. R. Lam”, or “D. Lam”. The appellants had previously engaged a subcontractor by the name of Van Sang Lam but had never employed or had dealings with anyone by the name of J. Lam, J. R. Lam, or D. Lam. Of these 114 cheques, six were signed by Boris Mange and the remaining 108 by Ms. Alm.

Fictitious and Non-Existing Payees

91. As noted by my colleague, s. 20(5) of the Act provides a defence to the respondent bank against an action for conversion in that a bill that is payable to a fictitious or non-existing person may be treated as payable to bearer. In so far as this section applies to any of the cheques which are the subject of the present appeal, the respondent stands in the position of a holder in due course of such cheques and cannot be sued for conversion by the drawer. On the facts of this case two different issues must be addressed under this section. First, are the 41 cheques which Ms. Alm made out to existing employees payable to fictitious persons? Second, are the 114 cheques with “J. Lam”, “J. R. Lam”, or “D. Lam” as the payee cheques made out to non-existent payees within the meaning of s. 20(5)? In addressing these questions it is necessary to remember that the cheque system is but one part of the bills of exchange system and that the underlying principles of the Act, including those of negotiability, certainty, and finality respecting commercial paper and commercial paper transactions, must be respected.

92. In addressing the first of these questions my colleague relies on the rules enunciated by Dean Falconbridge in the sixth edition of his textbook, Banking and Bills of Exchange (1956), at pp. 468-69, which read:

Whether a named payee is non-existing is a simple question of fact, not depending on anyone’s intention. The question whether the payee is fictitious depends upon the intention of the creator of the instrument, that is, the drawer of a bill or cheque or the maker of a note.

In the case of a bill drawn by Adam Bede upon John Alden payable to Martin Chuzzlewit, the payee may or may not be fictitious or non-existing according to the circumstances:

(1) If Martin Chuzzlewit is not the name of any real person known to Bede, but is merely that of a creature of the imagination, the payee is non‑existing, and is probably also fictitious.

(2) If Bede for some purpose of his own inserts as payee the name of Martin Chuzzlewit, a real person who was known to him but whom he knows to be dead, the payee is non-existing, but is not fictitious.

(3) If Martin Chuzzlewit is the name of a real person known to Bede, but Bede names him as payee by way of pretence, not intending that he should receive payment, the payee is fictitious, but is not non-existing.

(4) If Martin Chuzzlewit is the name of a real person, intended by Bede to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that Bede has been induced to draw the bill by the fraud of some other person who has falsely represented to Bede that there is a transaction in respect of which Chuzzlewit is entitled to the sum mentioned in the bill.

In his reasons, my colleague accepts these rules and interprets them as standing for the proposition that where a drawer does not intend a named payee to receive payment, the payee is fictitious and the bill must be read as payable to bearer. Applying this proposition to the facts of the case he states that the intention of the signor, Ms. Alm, cannot be equated to that of the drawer, the appellant companies, as Ms. Alm is not a guiding mind of the corporations. In consequence, the fourth rule applies and the payees are not fictitious within the meaning of s. 20(5).

93. The proposition embodied by s. 20(5) as it relates to the actions of fraudulent employees has been the subject of considerable judicial attention, starting with the House of Lords’ decision in Bank of England v. Vagliano Brothers, [1891] A.C. 107, and continuing up until this Court’s decisions in Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., 1976 CanLII 192 (SCC), [1977] 2 S.C.R. 456, and Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, 1982 CanLII 57 (SCC), [1982] 2 S.C.R. 488. It is fair to say that Dean Falconbridge’s fourth rule, which encompasses the situation of the fraudulent employee, merely reflects one line of reasoning within the jurisprudence (see Vinden v. Hughes, [1905] 1 K.B. 795, and Harley v. Bank of Toronto, 1938 CanLII 70 (ON CA), [1938] 2 D.L.R. 135 (Ont. C.A.)), and does not take into account various decisions that have gone the other way (see London Life Insurance Co. v. Molsons Bank (1904), 8 O.L.R. 238 (C.A.), and Metropolitan Life Insurance Co. v. Quebec Bank (1916), 50 C.S. 214). This fact has been acknowledged in the latest edition of the textbook (Crawford and Falconbridge, Banking and Bills of Exchange (8th ed. 1986), vol. 2), where the editor, Bradley Crawford, is critical both of the fourth rule and the cases that have produced it (at pp. 1259 and 1261):

The Canadian courts have been led into error by Warrington J. in Vinden v. Hughes and Dean Falconbridge’s endorsement of that judgment in early editions of this treatise.

It is probably of no use to point out that Falconbridge’s fourth proposition never was in accord with the actual result in Vagliano’s case where, it may be recalled, the acceptor was deceived by his clerk into signing bills he thought represented real transactions with real persons.

94. The problem with any black letter rule of law is that it offers no insight into the competing interests that underlie the conflict it allegedly resolves. Unfortunately, the cases that led to the formulation of Falconbridge’s fourth rule, and those that have applied it, have by and large also failed to consider these competing interests as well as the policy considerations inherent in the conflict. In the case of s. 20(5), the underlying conflict that arises when trying to decide its scope and application is that of the allocation of loss as between the accepting bank and the drawer of a fraudulent cheque. This conflict becomes ripe when it is an employee of the drawer, or a third person, that perpetrates the fraud and the loss must be borne by one of two innocent parties: the employer/drawer or the accepting bank.

95. As between the employer/drawer and the accepting bank, the questions are who should bear the risk of any loss and who is in the best position to minimize that risk. The answer to both these questions must, I suggest, be the employer/drawer. In cases such as the one at bar the accepting bank usually receives the fraudulent cheques from the hands of one of its customers who passes himself or herself off as the endorsee or holder of the cheque. Since the named payee is generally a stranger to the bank, the requirement of an endorsement on the cheque will more often than not be ineffective in protecting against fraud. As demonstrated by the facts of this case, it is easy enough for the perpetrator to forge the endorsement of the named payee and there is no way for the bank to verify the authenticity of the signature. On the other hand, the drawer/employer is in a much better position to put a stop to fraud of this type and is at least in an equal position to bear any loss. As a matter of course, any risk of loss on the part of a large corporation is generally covered by fidelity insurance. It is also possible for large scale fraud to be discovered through audits or other protective measures. If the drawer is a small company, as in the case at bar, then it is in an excellent position to detect the fraud at an early stage and in that way minimize the loss. From the facts of the present case it is clear that the only reason Ms. Alm was able to continue her illegal activities for such a long time was because no internal or independent audit was ever conducted by the appellants; nor was there a routine inspection of the cheque register or monthly bank statements. In short, the party in the best position to stop the fraudulent activity was, and generally is, the drawer/employer. In such a situation it makes sense to allocate the risk of loss to the drawer so that the proper steps can be taken to minimize such losses.

96. The problem with allocating the loss to the accepting bank is that it removes all incentive from a corporation to pursue business practices that will minimize such losses. Furthermore it has the effect of putting the accepting bank in the position of fidelity insurer for the appellants. I can see no justification for such a step. There is no doubt that the chartered banks, and trust companies for that matter, benefit from the existence of the chequing system. However it is also true that the business community in general also depends on the same chequing system to facilitate the function of commerce.

97. A second problem with allocating the loss to the accepting bank is that it does not fit in well with the general scheme of bills of exchange. The essence of a bill of exchange is its negotiability and the finality of payment inherent to such a negotiation. Imposing liability on the accepting bank rather than upon the party in the position to stop the fraud is inconsistent with these policies. Whether one is talking about the situation where a signing officer has acted fraudulently, or the situation where a payroll clerk induces an innocent signing officer to sign a fraudulent cheque, allocating the loss to the accepting bank would create a situation where the bank would be required to verify the validity of every single cheque it receives involving a corporate drawer. Applying such a scheme to the facts of the present case would have demanded that every time the respondent received a cheque drawn by the appellants it should have called the president of the appellants, Boris Mange, and verified with him that the appellants had truly intended to issue the cheque to the payee. Besides being impractical, such a procedure is simply not in keeping with the purpose or the scheme of the Act.

98. Notwithstanding what I see as the convincing policy arguments in favour of imposing the loss on the drawer/employer, I remain bound by this Court’s decision in Concrete Column, supra. In that case a majority of the Court held that where a payroll clerk had fraudulently filled out company cheques, and then fraudulently induced a signing officer to sign those cheques, they did not fall within the scope of s. 20(5). The intent of the payroll clerk was not the intent of the drawer; when he signed the cheques the latter had actually intended the named payees to receive payment. On its face the majority judgment endorses the fourth of Falconbridge’s rules, but as Laskin C.J. noted in dissent, this rule encompasses at least three different fact scenarios. At pp. 477-78, he stated:

In approaching this issue, I would distinguish three situations which have been treated in the case law and in the leading textbook in this country, Falconbridge, Banking and Bills of Exchange, supra, as not warranting differentiation. Thus, in the fourth proposition quoted above from that textbook, the author speaks of the fraud of “some other person”, that is, other than the drawer, which induced the drawing of the bill in the illustration there given. That person may, however, be a third person, as he was in the Agricultural Savings and Loan Association case, as he was in the Macbeth case, as he was in Bank of Toronto v. Smith and as he was in the Barbeau case; or he may be an employee who has been authorized to issue negotiable instruments, as in the Bromont case; or he may be an employee who has no authority to issue negotiable instruments but, on the other hand, is charged with the duty of making up the payroll for presentation to those authorized to issue cheques in the name of the drawer.

99. I agree with this distinction, though again for policy reasons I do not believe that the second and third scenarios should lead to different conclusions. However the fact situation in Concrete Column fell squarely within the third scenario. Similarly, the three cheques out of the 41 which Ms. Alm fraudulently produced and then induced Boris Mange to sign are also examples of the third scenario. Therefore, with respect to these three cheques only, having a combined face value of $1,655.17, the respondent’s defence under this section must fail in light of the majority’s decision in Concrete Column. However the remaining 38 cheques which Ms. Alm made out to existing employees, and which she herself signed in her capacity as a signing officer, are examples of the second scenario set out by Laskin C.J. in Concrete Column and do not fall within the scope of the majority’s decision in that case.

100. With respect I must disagree with my colleague’s conclusion that Ms. Alm’s fraudulent intent as the signing officer cannot be equated to the intent of the drawer, the appellant companies. As I understand it, the application of the law of agency leads to the inevitable conclusion that where the fraudulent employee is a signing officer of the drawer, then his or her intent must be taken as being the intent of the drawer. This issue was canvassed by Laskin C.J. in Concrete Column, where he reviewed the law of agency and of vicarious liability in tort. In particular, he thus addressed those situations where in the course of employment an employee defrauds a third party, at pp. 478-79:

Agency law, especially as it relates to vicarious liability in tort, has long ago departed from strict conceptions of authority (see, for example, Limpus v. London General Omnibus Co. [(1862), 1 H. & C. 526, aff'd 9 Jur. N.S. 333]) and has, similarly, departed from notions of benefit or detriment so that an employer may be held vicariously liable to a person injured by his employee's negligence, even though the employee has, while acting within the scope of his employment, carried out his duties in a way expressly prohibited by the employer: see, for example, Lockhart v. Stinson and C.P.R. [1941 CanLII 5 (SCC), [1941] S.C.R. 278, aff'd 1942 CanLII 366 (UK JCPC), [1942] A.C. 591]; and cf. Rose v. Plenty [[1976] 1 All E.R. 97].

Again, even where the employee defrauds a third person, his employer may have to answer for the fraud, as was the case in Lloyd v. Grace, Smith & Co. [[1912] A.C. 716], where a solicitor's clerk, acting in the course of his employment, and held out as authorized to deal with clients of the solicitor, defrauded a client of her property. The principle underlying this and other cases is an old one, based on a broad rule of policy, stated for England nearly three hundred years ago in Hern v. Nichols [(1708), 1 Salk. 289, 91 E.R. 256] and restated in fuller terms by the House of Lords in Lloyd v. Grace, Smith & Co., supra. There, Lord Shaw of Dunfermline put it as follows (at pp. 739‑40):

The case is in one respect the not infrequent one of a situation in which each of two parties has been betrayed or injured by the fraudulent conduct of a third. I look upon it as a familiar doctrine as well as a safe general rule, and one making for security instead of uncertainty and insecurity in mercantile dealings, that the loss occasioned by the fault of a third person in such circumstances ought to fall upon the one of the two parties who clothed that third person as agent with the authority by which he was enabled to commit the fraud....

This Court too has recognized the principle, as witness The Queen v. Levy Bros. Ltd. [1961 CanLII 58 (SCC), [1961] S.C.R. 189], at p. 192, where Ritchie J. quoted with approval the following passage from Story on Agency (7th ed.) para. 452:

... he (the principal) is held liable to third persons in a civil suit for the frauds, deceits, concealments, misrepresentations, torts, negligences, and other malfeasances, or misfeasances, and omissions of duty, of his agent, in the course of his employment, although the principal did not authorize, or justify, or participate in, or, indeed, know of such misconduct, or even if he forbade the acts, or disapproved of them.

101. In the present case there is no question that Ms. Alm acted beyond the ambit of what the appellants had in mind when she prepared and signed cheques made out to payees who were not their creditors. However it is equally clear that to the eyes of a third party she would have had the apparent authority to sign the cheques as she was an acknowledged signing officer of both Boma Manufacturing Ltd. and Panabo Sales Ltd. The general rule of agency is that a principal is bound by the acts of an agent when that agent is acting within the scope of his or her ordinary or apparent authority. The agent does not cease to bind the principal when he or she acts fraudulently in furtherance of his or her own purposes. That this is the law in Canada was acknowledged in Canadian Laboratory Supplies Ltd. v. Engelhard Industries of Canada Ltd., 1979 CanLII 44 (SCC), [1979] 2 S.C.R. 787, where Laskin C.J., speaking for the Court on this point, stated at p. 797:

There is, of course, no doubt in my mind that if an agent, in the exercise of an admitted authority in him in respect of his ordinary duties acts for his own benefit, his principal cannot deny liability for contracts he purports to make on behalf of the principal. It is only in such circumstances or where there is a representation from the principal that puts the agent in a position to act beyond the authority reposed in him that the principal can be bound.

102. In light of this principle, I am unable to see how the intent of Ms. Alm is not also the intent of the appellants, the drawer of the cheques. Ms. Alm was held out by the appellants as a signing officer and the very essence of this representation of agency was that to the outside world the intent of Ms. Alm was the intent of the appellants when it came to the issuing of cheques. Interestingly enough, this position is implicit in the majority’s decision in Concrete Column where it was the intent of a signing officer that was held to be the intent of the respondent corporation/drawer, even though there was no indication that the signing officer in that case was a guiding mind of the corporation. There is simply no authority for the position adopted by my colleague on this point. Nor should there be, given the principles of the law of agency stated above. As a result, I find that the 38 cheques prepared and signed by Ms. Alm, and payable by way of pretence to employees of the appellants, are payable to fictitious persons within the meaning of s. 20(5) of the Act and in consequence must be treated as payable to bearer. As such the respondent is a holder in due course of these cheques and cannot be liable to the appellants for conversion.

103. The above discussion is based on the premise that the loss must be borne in its entirety by one party or the other. However, I am not yet prepared to discount the possibility that in a proper case the loss should be apportioned between the employer/drawer and the accepting bank. There is much to be said for the view that this would be the fairer course. One, but possibly not the only, vehicle that would allow this to occur would be a suit in negligence. In a suit in negligence apportionment is specifically provided for through the mechanism of contributory negligence. The principal difficulty with such an approach is that the courts in both England and Canada have traditionally been unwilling to find that a duty of care exists between the rightful owner of a cheque and an accepting bank (see Crawford and Falconbridge, supra, at p. 1040). However, that type of reasoning is reminiscent of the time before the law could take contributory negligence into account by virtue of either legislation or judicial development.

104. Though the appellants in the present case originally alleged both conversion and negligence, and contributory negligence was pleaded by the respondent in turn, I need not enter further into the issue. The negligence action was dismissed by the trial judge and not pursued on appeal. Even if the negligence action were before us, or contributory negligence could otherwise be raised, the worst that can be said about the respondent is that it failed to follow its internal policy in accepting cheques for deposit that had not been endorsed. However the evidence is clear that the requirement for an endorsement was no obstacle to Ms. Alm’s activities and thus any negligence on the part of the respondent was not causally linked to the appellants’ loss. In short, assuming it is possible to do so, this is not an appropriate case for apportionment.

Non-Existent Persons

105. The majority of the cheques in this case, 114 in total, are not cheques to an existing person at all but rather to an imaginary person created by Ms. Alm for her own purposes. Unlike the debate surrounding the interpretation of a fictitious person, the concept of a non-existent person within the meaning of s. 20(5) is well settled: if the payee on a cheque is a matter of pure invention and not a real person then the payee is non-existent. There is no support for the position that this is a subjective test based on what the signor of a cheque believes is true; rather it is an objective question of fact ‑‑ is the payee an invention of the employee? (see Crawford and Falconbridge, supra, at p. 1264, and Clutton v. George Attenborough & Son, [1897] A.C. 90 (H.L.)). This question was never addressed by either the trial judge or the Court of Appeal. In the reasons of both these courts there is no more than the recitation from paragraph 45 of the Agreed Statement of Facts that Boris Mange knew that the appellants engaged a subcontractor named Lam, “but had either forgotten, or never knew, his first name or initials”. In this light I cannot agree that the trial judge’s comments on this point were tantamount to a finding of fact.

106. On the basis of the Agreed Statement of Facts, there is no doubt that Boris Mange did not know a D. Lam, J. Lam, or J. R. Lam. It may well be that he thought they were the same person as his contractor Van Sang Lam, but that is not the question that needs to be asked. What is determinative is that on an objective standard the payees were non-existent to the knowledge of the signor, whether that be Ms. Alm or Boris Mange. I note that paragraph 43 of the Agreed Statement of Facts states that no person with the name D. Lam, J. Lam or J. R. Lam was known to the appellants, while paragraph 46 of the Agreed Statement of Facts says that Boris Mange simply assumed that the cheques payable to J. Lam and J. R. Lam were payable to the appellants’ subcontractor with the last name of Lam. As a result, the remaining 114 cheques clearly fall within the scope of s. 20(5) of the Act and are to be treated as payable to bearer. Therefore the respondent is a holder in due course of these cheques and has a complete defence against the action of the appellants.

Section 165(3) ‑‑ The Bank as a Holder in Due Course

107. The second ground of defence raised by the respondent bank is that it has the rights of a holder in due course of the subject cheques via the operation of s. 165(3) of the Act, which reads as follows:

108. . . .

(3) Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.

At first sight, this provision appears to remove from an accepting bank the obligation of satisfying the general requirements for becoming a holder in due course set out in s. 55 of the Act: namely that the cheque must be taken by negotiation, for value, and in good faith. In the case of a cheque payable to order, negotiation would require the valid endorsement of the payee or endorsee. By removing the need for these requirements, it may be said that s. 165(3) effectively removes any difference between a cheque payable to order and one payable to bearer; as long as the cheque is delivered to the accepting bank, and the depositor’s account is credited with the amount of the cheque, the bank has the rights of a holder in due course of the cheque and takes the cheque free of any defect of title.

108. So interpreted, s. 165(3) would amount to a sweeping grant of powers to the banks, a possibility that has received almost unanimous condemnation and persistent calls for reform since its introduction into the Act in 1966 (see S. Scott, “The Bank is Always Right: Section 165(3) of the Bills of Exchange Act and its Curious Parliamentary History” (1973), 19 McGill L.J. 78; S. Martin, “Section 165(3) of the Bills of Exchange Act” (1985), 11 C.B.L.J. 23; Law Reform Commission of Canada, The Cheque: Some Modernization (1979)).

109. My colleague has attempted to restrict the scope of the section by interpreting the word “person” as being limited to the payee or the legitimate endorsee of the payee of the cheque only, with the result that the provision would be of no help to the respondent in the present case. The word “person” is clearly capable of diverse meanings depending on the circumstance in which it is used. Where a court is faced with the situation where there is more than one possible construction of the statutory provision before it, and the result of one construction would lead to manifest absurdity or injustice (see E. A. Driedger, Construction of Statutes (2nd ed. 1983), at p. 47, and Grey v. Pearson (1857), 6 H.L.C. 60), it is well established that a court will adopt the construction that does not lead to that result, even though the words used would strongly favour the alternative construction; see, for example, Caledonian Railway Co. v. North British Railway Co. (1881), 6 App. Cas. 114 (H.L.). The situation here militates in favour of this approach. There is no question that if s. 165(3) is given the scope advanced by the respondent it will both be in disharmony with the general scheme for cheques set out in the Act, and has the potential for inflicting considerable injustice on the drawers of cheques. On the other hand, the interpretation adopted by my colleague avoids these results and is in keeping with the apparent intent of Parliament in introducing the section: the desire to protect banks in those situations where a cheque is restrictively endorsed or where the payee fails to endorse a cheque upon presenting it to an accepting bank for deposit. Neither of these situations is present in the case at bar.

110. Accordingly I would dismiss the appeal and the cross-appeal, both with costs. Based on my findings with respect to the application of s. 20(5) I would have reduced the judgment of the Court of Appeal in favour of the appellants from $5,390.12 to $1,655.17, this amount being the face value of the three cheques fraudulently prepared by Ms. Alm but signed by Boris Mange in favour of existing employees. However the respondent did not cross-appeal on this issue and the judgment of the Court of Appeal shall stand as is.

Appeal allowed, La Forest and McLachlin JJ. dissenting, and cross‑appeal dismissed.

Solicitors for the appellants: Baumgartel Gould, New Westminster, B.C.

Solicitors for the respondent: Davis & Company, Vancouver.