SUPREME COURT OF CANADA

Citation: B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504

Date: 20090402

Docket: 31930

Between:

B.M.P. Global Distribution Inc.

Appellant

and

Bank of Nova Scotia doing business as the Scotiabank and the said Scotiabank

Respondent

And:

Bank of Nova Scotia doing business as the Scotiabank and the said Scotiabank

Appellant

and

B.M.P. Global Distribution Inc., 636651 B.C. Ltd., Audie Hashka and Paul Backman

Respondents

Coram: McLachlin C.J. and Binnie, LeBel, Deschamps and Rothstein JJ.

Reasons for Judgment: (paras. 1 to 94)

Deschamps J. (McLachlin C.J. and Binnie, LeBel and Rothstein JJ. concurring)

B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504

B.M.P. Global Distribution Inc. Appellant

v.

Bank of Nova Scotia doing business as the Scotiabank and the said Scotiabank Respondent

‑ and ‑

Bank of Nova Scotia doing business as the Scotiabank and the said Scotiabank Appellant

v.

B.M.P. Global Distribution Inc., 636651 B.C. Ltd., Audie Hashka and Paul Backman Respondents

Indexed as: B.M.P. Global Distribution Inc. v. Bank of Nova Scotia

Neutral citation: 2009 SCC 15.

File No.: 31930.

2008: May 15; 2009: April 2.

Present: McLachlin C.J. and Binnie, LeBel, Deschamps and Rothstein JJ.

on appeal from the court of appeal for british columbia

Financial institutions — Banks and banking operations — Fraudulent cheque — Banks’ rights to recover money paid under mistake of fact and to trace funds — Collecting bank releasing funds in customer’s account after drawee bank cleared cheque — Customer transferring portion of funds in its account to related accounts — Drawee bank later finding cheque to be fraudulent and requesting assistance of collecting bank to recover funds — Collecting bank restraining funds in customer’s account and related accounts under its control and transferring funds back to drawee bank — Whether drawee bank can recover payment made under mistake of fact — Whether collecting bank had right to claim funds in customer’s account and to trace funds in related accounts.

Restitution — Mistake of fact — Fraudulent cheque — Whether money paid by bank recoverable from payee.

Commercial law — Bills of exchange — Fraudulent cheque — Whether money paid by bank recoverable from payee.

H and B owned interests in BMP, a company operating in British Columbia that distributed non‑stick bakeware. They reached an agreement to sell the right to distribute the bakeware in the United States with a person they had recently met there. They subsequently received an unendorsed cheque of C$904,563 payable to BMP. The cheque was drawn on the account of a company at the Royal Bank (“RBC”). Neither this company nor the name of the sender of the envelope containing the cheque was known to H or B or was apparently linked to the business purchasing the right to distribute the bakeware. H went to a branch of the Bank of Nova Scotia (“BNS”) where BMP held an account to deposit the cheque. BNS did not provide BMP with immediate access to the funds, but eventually received the funds from RBC in the ordinary course of business and released them to BMP. On that day and over the next 10 days, BMP made numerous transfers to other BNS accounts related to H, B, and H’s holding company. RBC subsequently notified BNS that the cheque for $904,563 was counterfeit, as the drawer’s signatures were forged and asked for BNS’s assistance. BNS interrupted all transactions in BMP’s account and in all related accounts and asked BMP for assistance in recovering the proceeds of the forged cheque. BMP insisted on retaining the amount it still held. BNS then restrained the funds in accounts under its control that it linked to the forged cheque. RBC and BNS entered into an agreement by which BNS was, at RBC’s request, to transfer the restrained funds to RBC and RBC was to indemnify BNS for any losses related to the restraint and transfer. BNS transferred $777,336 to RBC.

BMP, H, B, and H’s holding company sued BNS and claimed damages equivalent to the restrained amount, as well as non‑pecuniary, aggravated and punitive damages. The trial judge ordered BNS to pay $777,336 in total pecuniary damages and also awarded damages for wrongful disclosure of information and defamation. In his view, BNS had violated the service agreement as well as the law applicable to banker/customer relations by charging back amounts credited to BMP’s and the related accounts. The Court of Appeal allowed BNS’s appeal against BMP by reducing the latter’s damages to $101. As to the funds traced in the related accounts, the court found that BMP’s transfers were proper and that the cheques were actual bills of exchange and dismissed the appeals against H, B and H’s holding company. In this Court, BMP appealed the Court of Appeal’s reversal of the trial judge’s conclusion on damages and also asked for punitive damages. BNS cross‑appealed on the issue of tracing in the related accounts. It seeks the reversal of the Court of Appeal’s decision and of the trial judge’s damage award in favour of the holders of the related accounts.

Held: The appeal should be dismissed and the cross‑appeal allowed.

If a person pays money to another under a mistake of fact which causes him to make the payment, he or she is prima facie entitled to recover it. The person’s claim may fail, however, if (1) the payor intends that the payee shall have the money at all events or is deemed in law so to intend; (2) the payment is made for good consideration; or (3) the payee has changed his position in good faith or is deemed in law to have done so. Here, RBC had a right to recover the money paid to BMP. RBC’s payment was made on the basis of a forged cheque and the defences are not available to BMP in the circumstances of this case. [22] [24]

RBC, as drawee, provided the funds under the mistaken assumption that the drawer’s signature was genuine. In this situation, the payor cannot be said to have intended the payee to keep the money in any event. Nor is RBC deemed in law to intend that BMP keep the money. First, the principle of finality of payment acts as a general goal, but it does not negate rights that may otherwise accrue to a party and it cannot be raised by a payee as an indiscriminate bar to the recovery of a mistaken payment. Second, ss. 128(a) and 165(3) of the Bills of Exchange Act do not prevent RBC from recovering the money it paid by mistake. BMP did not take the instrument for value, so it was not a holder in due course. Since only a holder in due course can benefit from s. 128(a), even if RBC was deemed, by payment, to have accepted the forged cheque, it would not be precluded from denying to BMP the genuineness of the signatures of the drawer. Section 165(3) deems the collecting bank to be in the same position as a party who has taken the bill free from any defect of title of prior parties. A bank, however, is not obligated to rely on the s. 165(3) protection when restitution is claimed from it. The payee, BMP, stands as a third party with respect to this protection. The payee may benefit from defences that are inherent in the rules on mistake of fact, but not from the protection of s. 165(3). Third, nothing in the service agreement between BMP and BNS precluded BNS from returning the funds to RBC. Clause 4.7 of the agreement gives the bank an explicit right to charge back amounts credited to the customer’s account if an instrument is not settled. The settlement referred to in this clause is the receipt of the funds through the banking system, and more particularly through the clearing mechanism available to members of the Canadian Payments Association. Although the restraint of the funds by BNS could not be based on clause 4.7, since BNS had received settlement from RBC, the contract does not preclude the application of the common law where a payment has been made under a mistake of fact. The service agreement is a standard form contract and the doctrine of mistake of fact can be seen as an implied term of the agreement. This is even more true here where a clause of the service agreement explicitly provides that BNS retains its rights under “any law” (clause 17.3). Furthermore, the clearing rules of the Canadian Payments Association could not be relied on to arrive at the conclusion that BMP had a right to the proceeds of the forged cheque. These rules apply only to relations between members of the Association and they themselves provide for the survival of the members’ common law rights (clause 1(b) of Rule A4). They do not create entitlement for third parties and the service agreement did not incorporate the clearing rules for BMP’s benefit. [26‑28] [35] [39‑41] [45] [48] [50-58]

The question whether BMP has given consideration must be answered in the negative in light of the trial judge’s finding of fact that BMP gave no value for the instrument. Lastly, BMP did not change its position. Once the collecting bank receives the funds from the drawee and credits the payee, its role as a collecting bank is terminated. It then becomes the holder of the funds under its contract with its customer. When a customer deposits funds into an account, the customer becomes a creditor of the bank and the bank holds these funds as its own until the customer asks for repayment. Although, once the funds were credited in BMP’s account, BNS’s role was changed from that of a collecting bank to that of a borrower, for the purpose of the change of position analysis, it must be concluded that BNS remained the holder of the funds. Neither BNS as the holder of the funds nor the payee had changed its position, since at the time they were restrained, the funds now claimed by BMP were still credited to its account. [61-64]

All the conditions for recovery of the payment made by mistake are met. As BNS was entitled to give effect to RBC’s claim for restitution of the moneys paid under mistake of fact, the jus tertii argument fails. The rightful owner had a legitimate claim against the recipient, and BNS had no duty to give preference to BMP. BMP insisted on retaining the funds even though it had given no consideration for them and even though the fraud was beyond dispute. BMP did not lose anything because the funds had to be returned to RBC. BNS’s actions entailed no risk of curtailing the protection from which a holder in due course is entitled to benefit. Finally, there are no policy considerations that would preclude BNS from responding to RBC’s common law right in this case. [65-73]

BNS had the right to claim the amount in BMP’s account and to trace funds in the related accounts. There is no issue of identification of the money in BMP’s account. The unchallenged evidence clearly indicates that it comes from the funds received from RBC. BNS, as agent, received the funds from RBC and, after crediting them to its principal, BMP, received them back under the banking contract. Having received the funds back, BNS had to make restitution to RBC. BNS’s status with respect to the funds in the related accounts is different since BNS was not acting as agent of the holders of the related accounts. It is possible at common law to trace funds into bank accounts if it is possible to identify the funds. When the chain is broken by one of the intervening parties paying from its own funds, identification of the claimant’s funds is no longer possible. However, the clearing system is a neutral factor and does not constitute a systematic break in the chain of possession of the funds. Paying through the clearing system amounts to no more than channelling the funds. Certification also does not affect the traceability of the underlying funds. Here, the funds have not lost their identity. When BNS acted on BMP’s instructions and transferred money to the related accounts, the transferred funds were clearly related to the forged cheque BNS had mistakenly credited to BMP’s account. The fact that some of the related accounts had prior balances is not a bar to recovery. Not only were the balances not substantial, but RBC can trace its own contribution to the balances remaining in the accounts since the withdrawals of all those who received funds far exceeded their contributions. [77] [83‑88]

In light of the conclusion that BNS could resist BMP’s claim on the basis of the doctrine of mistake of fact, BMP’s related claim for punitive damages can only fail. [91‑92]

Cases Cited

Applied: Agip (Africa) Ltd. v. Jackson, [1992] 4 All E.R. 451, aff’g [1992] 4 All E.R. 385; Banque Belge pour l’Étranger v. Hambrouck, [1921] 1 K.B. 321; explained: Bank of Montreal v. The King (1907), 1907 CanLII 29 (SCC), 38 S.C.R. 258; referred to: Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd., [1979] 3 All E.R. 522; Royal Bank v. The King, 1931 CanLII 304 (MB KB), [1931] 2 D.L.R. 685; Royal Bank of Canada v. LVG Auctions Ltd. (1983), 1984 CanLII 1921 (ON CA), 43 O.R. (2d) 582, aff’d (1984), 1984 CanLII 3074 (ON CA), 12 D.L.R. (4th) 768; Toronto‑Dominion Bank v. Pella/Hunt Corp. (1992), 1992 CanLII 7429 (ON SC), 10 O.R. (3d) 634; A.E. LePage Real Estate Services Ltd. v. Rattray Publications (1994), 1994 CanLII 1506 (ON CA), 120 D.L.R. (4th) 499; Central Guaranty Trust Co. v. Dixdale Mortgage Investment Corp. (1994), 1994 CanLII 1429 (ON CA), 24 O.R. (3d) 506; Price v. Neal (1762), 3 Burr. 1354, 97 E.R. 871; Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548; St. Martin Supplies Inc. v. Boucley, [1969] C.S. 324; Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727; Bank of Montreal v. Attorney General of Quebec, 1978 CanLII 173 (SCC), [1979] 1 S.C.R. 565; Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110; Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC), [1987] 1 S.C.R. 711; National Bank of Greece (Canada) v. Bank of Montreal, 2000 CanLII 16791 (FCA), [2001] 2 F.C. 288; Bank of Nova Scotia v. Regent Enterprises Ltd. (1997), 1997 CanLII 14711 (NL CA), 157 Nfld. & P.E.I.R. 102; Toronto‑Dominion Bank v. Dauphin Plains Credit Union Ltd. (1992), 1992 CanLII 8581 (MB QB), 90 D.L.R. (4th) 117, rev’d (1992), 1992 CanLII 8544 (MB CA), 98 D.L.R. (4th) 736, leave to appeal refused, [1993] 2 S.C.R. vii; Rural Municipality of Storthoaks v. Mobil Oil Canada, Ltd., 1975 CanLII 156 (SCC), [1976] 2 S.C.R. 147; Foley v. Hill (1848), 2 H.L.C. 28, 9 E.R. 1002; Bank Canadian National v. Gingras, 1977 CanLII 220 (SCC), [1977] 2 S.C.R. 554; British American Continental Bank v. British Bank for Foreign Trade, [1926] 1 K.B. 328; Bavins, Junr. & Sims v. London and South Western Bank, Ltd., [1900] 1 Q.B. 270; Citadel General Assurance Co. v. Lloyds Bank Canada, 1997 CanLII 334 (SCC), [1997] 3 S.C.R. 805; Taylor v. Plumer (1815), 3 M. & S. 562, 34 E.R. 721; Foskett v. McKeown, [2001] 1 A.C. 102; Lawrie v. Rathbun (1876), 38 U.C.Q.B. 255; Carter v. Long & Bisby (1896), 1896 CanLII 18 (SCC), 26 S.C.R. 430; Centrac Inc. v. Canadian Imperial Bank of Commerce (1994), 1994 CanLII 932 (ON CA), 21 O.R. (3d) 161.

Statutes and Regulations Cited

Bills of Exchange Act, R.S.C. 1985, c. B‑4, s. 48(1), 55(1)(b), ss. 128(a), (b), 165(3).

Authors Cited

Ames, J. B. “The Doctrine of Price v. Neal” (1891), 4 Harv. L. Rev. 297.

Birks, Peter. “Overview: Tracing, Claiming and Defences”, in Peter Birks, ed., Laundering and Tracing. Oxford: Clarendon Press, 2003.

Crawford, Bradley. 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., vol. 1. Toronto: Canada Law Book, 1986.

Crawford, Bradley. Payment, Clearing and Settlement in Canada, vol. 1, Policies, Institutions and Systems. Aurora, Ont.: Canada Law Book, 2002.

Fridman, G. H. L. Restitution, 2nd ed. Scarborough, Ont.: Carswell, 1992.

Geva, Benjamin. “Conversion of Unissued Cheques and the Fictitious or Non‑Existing Payee — Boma v. CIBC” (1997), 28 Can. Bus. L.J. 177.

Geva, Benjamin. “Reflections on the Need to Revise the Bills of Exchange Act — Some Doctrinal Aspects: Panel Discussion” (1981‑82), 6 Can. Bus. L.J. 269.

Goff of Chieveley, Lord, and Gareth Jones. The Law of Restitution, 6th ed. London: Sweet & Maxwell, 2002.

Goode, R. M. “The Right to Trace and its Impact in Commercial Transactions — I” (1976), 92 L.Q. Rev. 360.

Hall, Geoff R. Canadian Contractual Interpretation Law. Markham, Ont.: LexisNexis, 2007.

Klinck, Dennis R. “‘Two Distincts, Division None’: Tracing Money into (and out of) Mixed Accounts” (1988), 2 B.F.L.R. 147.

Maddaugh, Peter D., and John D. McCamus. The Law of Restitution. Aurora, Ont.: Canada Law Book, 2004 (loose‑leaf updated August 2008, release 4).

Millett, Peter J. “Tracing the Proceeds of Fraud” (1991), 107 L.Q. Rev. 71.

Ogilvie, M. H. Bank and Customer Law in Canada. Toronto: Irwin Law, 2007.

Scott, Stephen A. “Comment on Benjamin Geva’s Paper: ‘Reflections on the Need to Revise the Bills of Exchange Act — Some Doctrinal Aspects’” (1981‑82), 6 Can. Bus. L.J. 331.

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.

Smith, Lionel D. The Law of Tracing. Oxford: Clarendon Press, 1997.

Ulph, Janet. “Retaining Proprietary Rights at Common Law Through Mixtures and Changes”, [2001] L.M.C.L.Q. 449.

Ziegel, Jacob S., Benjamin Geva and R. C. C. Cuming. Commercial and Consumer Transactions: Cases, Text and Materials, 3rd ed., vol. II, Negotiable Instruments and Banking by Benjamin Geva. Toronto: Emond‑Montgomery, 1995.

APPEAL and CROSS‑APPEAL from a judgment of the British Columbia Court of Appeal (Huddart, Saunders and Low JJ.A.), 2007 BCCA 52, 24 B.L.R. (4th) 201, 278 D.L.R. (4th) 501, 3 W.W.R. 649, 235 B.C.A.C. 252, 388 W.A.C. 252, 63 B.C.L.R. (4th) 214, [2007] B.C.J. No. 137 (QL), 2007 CarswellBC 155, allowing an appeal and dismissing a cross‑appeal from a decision of Cohen J., 2005 BCSC 1091, 8 B.L.R. (4th) 247, [2005] B.C.J. No. 1662 (QL), 2005 CarswellBC 1826. Appeal dismissed and cross‑appeal allowed.

Paul E. Jaffe and Dean Fox, for the appellant and the respondents on cross-appeal.

D. Geoffrey G. Cowper, Q.C., Brook Greenberg and Jennifer Francis, for the respondent/appellant on cross-appeal.

The judgment of the Court was delivered by

Deschamps J. —

1. Facts

[1] The issue in this case is whether a bank must pay damages to customers for debits made from their accounts when reversing credits that had been entered in relation to a forged cheque. The trial judge, although acknowledging that his conclusion was absurd, found for the holders of the accounts. With respect, I agree with the Court of Appeal, albeit for different reasons, that the law does not dictate such a result. I also conclude that where money has been transferred in circumstances in which it can still be identified, tracing is permitted.

[2] As Saunders J.A. wrote for the Court of Appeal, the tale in this case is a strange one. It started when Audie Hashka and Paul Backman met Sunn Newman in the United States. Newman was said to be associated with a concern called Sunrise Marketing. Hashka and Backman owned interests in the appellant, B.M.P. Global Distribution Inc. (“BMP”), a company operating in British Columbia that distributed non‑stick bakeware without any formal licence or written agreement with its supplier. As the trial judge found, neither party was known to the other and neither had any business information concerning the other. According to Hashka and Backman, upon their return to Canada, an oral agreement was reached by telephone that Newman or Sunrise Marketing would purchase the right to distribute the bakeware in the United States. In the trial judge’s words, “Backman agreed that Hashka arrived at the price of US $1.2 million by pulling the number out of the air” (2005 BCSC 1091, 8 B.L.R. (4th) 247, at para. 13). No projected cash flow statements, business plans or marketing plans were used as a basis for the negotiations, and BMP had conducted no research into Newman or Sunrise Marketing. The trial judge added: “Further, Newman did not request copies of BMP Global’s financial statements or sales records (indicating a net loss of approximately $3,500), nor did BMP Global offer to provide this kind of information to Newman” (para. 13). According to Backman, he and Hashka decided to do business with Newman because he “was a sharp-looking guy that seemed like he had a lot of potential”. Hashka testified that Newman “seemed like a businessman” because he “dressed well”.

[3] On October 22, 2001, Hashka went to a Burnaby branch of the Bank of Nova Scotia (“BNS”) where BMP held an account. He said that he wanted to deposit an unendorsed cheque for C$904,563 that was payable to BMP. He informed the branch manager that the cheque was a down payment for distributorship rights for BMP’s products in the eastern United States (trial judgment, at para. 20). The cheque was drawn on an account of a corporation called First National Financial Corporation (“First National”) at a Toronto branch of the Royal Bank of Canada (“RBC”). The cheque had been received the same day, without a cover letter, in an envelope on which the sender’s name and address appeared as E. Smith of 6‑6855 Airport Road, Mississauga, Ontario, L4V 1Y9, (416) 312‑7205. Neither the drawer of the cheque nor the sender was known to Hashka or Backman or was apparently linked to Newman. No attempts were made to contact either First National or E. Smith before the cheque was taken to the bank.

[4] On receiving the cheque, BNS recorded it as a deposit to BMP’s account. The cheque was not endorsed. BNS did not provide immediate access to the $904,563, because the funds already credited to the account were not sufficient to cover the amount of the cheque: the balance prior to the deposit was $59.67. The circumstances were so unusual that the branch manager informed Hashka and Backman that the funds would be held until the bank was satisfied that the instrument was authentic (trial judgment, at para. 282). BNS contacted RBC to ensure that there were sufficient funds in First National’s account and that a hold had not been placed on the cheque. BNS eventually received the funds in the ordinary course of business and released them on October 30, 2001. On that date and over the next ten days, BMP made numerous transactions, including a transfer of US$20,000 to a Citibank account in New York City whose holder Hashka and Backman said they did not know. The largest transfers were to accounts of Hashka and Backman and to an account opened on November 2, 2001 in the name of a holding company, 636651 B.C. Ltd., that was wholly controlled by Hashka. The Court of Appeal described this flurry of transactions as a dispersion of funds (2007 BCCA 52, 24 B.L.R. (4th) 201, at para. 11).

[5] The movements of funds involving BMP’s account and the accounts of Hashka, Backman and 636651 B.C. Ltd. can be summarized as follows:

1. On November 5, two cheques drawn on BMP’s account were deposited in the account of 636651 B.C. Ltd., one, certified by BNS, in the amount of $100,000 and the other in the amount of $300,000. Prior to these deposits totalling $400,000, the balance of the account was zero. After the deposits, $7,000 was used to pay travelling expenses and personal expenses incurred by Hashka.

2. A total of $70,000 was transferred from BMP’s account to Backman’s chequing account by way of deposits of $50,000 on October 29 and $20,000 on November 1. Prior to these deposits, the balance in the account was $45.87. A total of $52,351.81 was used to make purchases and retire outstanding debts incurred before the forged cheque was deposited in BMP’s account. A deposit of $17.11 was made on November 3 as a result of a point of sale refund from a Future Shop store.

3. An amount of $3,000 was transferred from Backman’s chequing account to his savings account. The prior balance of the savings account was $74.35. No other deposits were made into this account. From the savings account, $428.56 was used to pay outstanding debts incurred prior to the receipt of the forged cheque.

4. A total of $20,000 was transferred from BMP’s account to Hashka’s account. The prior balance in Hashka’s account was $236.29. In addition, a payroll cheque for $3,022.49 was deposited on October 30. A total of $10,153.91 was used to pay personal debts, day-to-day expenses and entertainment expenses.

5. A certified cheque in the amount of $300,000 dated November 2, drawn by BMP and made to the order of BMP, was taken to the Bank of Montreal. On November 7, a bank draft issued by the Bank of Montreal for $300,100 was deposited by BMP in its account at BNS. No explanation has been provided for the disbursement or the subsequent deposit.

[6] On November 9, 2001, RBC notified BNS that the cheque for $904,563 deposited in BMP’s account on October 22, 2001 was counterfeit, as the drawer’s signatures were forged and asked for BNS’s assistance. BNS interrupted all transactions in BMP’s account and in all related accounts and asked BMP for assistance in recovering the proceeds of the forged cheque. BMP insisted on retaining the amount it still held. BNS then restrained the following amounts in accounts under its control that it had linked to the forged cheque:

BMP’s account $350,188.65

636651’s account $393,000.00

Backman’s chequing account $ 17,711.17

Hashka’s account $ 13,104.87

Backman’s savings account $ 2,645.79

Total $776,650.48

In addition, BNS recovered $685.56 by reversing bill payments made from BMP’s account. (When referring globally to the accounts other than that of BMP, I will call them the “related accounts”.)

[7] On December 6, 2001, RBC and BNS entered into an agreement in which RBC represented and warranted that the “cheque dated October 12, 2001, in the amount of nine hundred and four thousand five hundred and sixty-three dollars ($904,563.00) payable to BMP Global Distribution Inc. was counterfeit . . . [and] was deposited into Scotiabank account number 30460 00178-17 . . . [and] that the proceeds of the Counterfeit Cheque are proceeds of fraud”. Under this agreement, BNS was, at RBC’s request, to transfer the restrained funds to RBC and RBC was to indemnify BNS for any losses related to the restraint and transfer. On December 7, 2001, BNS transferred $777,336.04 to RBC.

[8] BMP’s account was governed by a standard‑form financial services agreement (“service agreement”). The relevant clauses are discussed below.

[9] BMP, Hashka, Backman and 636651 B.C. Ltd. claimed damages equivalent to the restrained amounts, non-pecuniary damages for stress, wrongful disclosure of information and defamation, aggravated and punitive damages. Backman also claimed damages regarding BNS’s failure to honour certain payment instructions while his account was restrained. The issue of damages for stress, wrongful disclosure of information and defamation is not before this Court.

2. Decisions of the Courts Below

2.1 British Columbia Supreme Court, [2005 BCSC 1091](https://www.canlii.org/en/bc/bcsc/doc/2005/2005bcsc1091/2005bcsc1091.html), 8 B.L.R. (4th) 247

[10] Cohen J. found that since BMP was not suing to enforce payment of the cheque, whether or not the cheque was a nullity or whether or not accepting BMP’s position would allow a windfall to accrue to BMP had no bearing on the outcome of the litigation (paras. 284-85). In his view, BNS had violated the service agreement as well as the law applicable to banker/customer relations by charging back amounts credited to the accounts of BMP and the other plaintiffs. Cohen J. interpreted the service agreement as incorporating the clearing rules of the Canadian Payments Association (“clearing rules”) and precluding BNS from charging back against its customer’s account. He reasoned that once “final settlement on the deposit of the Counterfeit Cheque had been reached between the BNS and the RBC”, the funds in BMP’s account “went from being a ‘provisional’ credit to being a ‘final’ credit. At that stage the relationship between the BNS and the plaintiffs was that of debtor/creditor” (para. 306). Regarding the related accounts, Cohen J. found that the law prevented a bank charging back against a customer’s account without the customer’s permission. He awarded the plaintiffs pecuniary damages because they had “suffered a loss of their right to demand repayment from the BNS of the BNS’ debt to them by reason of the BNS’ wrongful charge backs against their respective bank accounts” (para. 423). He assessed the total pecuniary damages at $777,336.04, the sum of all the charge backs and the reversed payments. He also awarded Backman $13.50 for a late charge due to BNS’s failure to honour certain payment instructions while his account was restrained. Cohen J. also awarded damages for wrongful disclosure of information and defamation.

2.2 British Columbia Court of Appeal, [2007 BCCA 52](https://www.canlii.org/en/bc/bcca/doc/2007/2007bcca52/2007bcca52.html), 24 B.L.R. (4th) 201

[11] The unanimous judgment of the Court of Appeal was rendered by Saunders J.A. She framed the issue as a fraud designed to place a credit in BMP’s account for which BMP gave nothing. In her view, the courts were being asked to indirectly complete the fraud. She accepted the trial judge’s finding that BNS had breached its banking agreement when it reversed the credit in BMP’s account over BMP’s opposition. However, she found that two characteristics of the case made it unusual. The first was that

the fact of two banks, and the consequent issues arising of clearing rules and the Bills of Exchange Act, confuse what would be otherwise a simple conclusion in these circumstances. The interposition in the fraudster’s scheme of the Royal Bank of Canada created the screen of the clearing system. In this sense, the fraud may be described as extra-layered. The issue is whether that extra layering, in the circumstances I have just described, entitles BMP to recover from the Bank of Nova Scotia, as ordered by the trial judge. [para. 26]

Indeed, Saunders J.A. said that if only one bank had been involved in the payment, it would have been entitled to debit BMP’s account, because the money was paid under a mistake of fact. The second unusual characteristic was the fact that

BMP is an innocent in the fraud. Thus we know that BMP did not overtly assist the author of the scheme in its iniquitous aspects, whether or not the author has already been paid, unknowingly, by the cheque to Citibank, or was a gratuitous fraudster, or was a fraudster who has not yet presented his bill. For that reason, the many cases concerning recovery of monies from persons implicated in a fraud have no bearing on this case. [para. 27]

[12] Saunders J.A. did not delve further into what she called “the screen of the clearing system”. She went on to find that

on a plain reading of s. 48, the counterfeit cheque, because of the forged signatures on it, was wholly inoperative, setting the stage for a claim for return of monies advanced in reliance upon it.

Section 48 demonstrates the prima facie empty asset that BMP builds its claim around.

In equity, then, would this cheque have provided a basis upon which BMP could hope to retain the funds credited to its account? In my view the answer is no. [paras. 33‑35]

[13] Saunders J.A. then found that it would be against good conscience to give a monetary judgment that would accomplish the substance of the fraud. She added that BMP could not claim the windfall — it had lost nothing: it did not change its position as a result of the charge back. She found that the arguments about the alleged rights of BMP, 636651 B.C. Ltd., Hashka and Backman under the clearing system rules were inconsistent with the principles of equity. She also found that, except for the $100 added to the original amount of $300,000, the funds linked to the bank draft issued by the Bank of Montreal bore the same character as the credit obtained from the deposit of the forged cheque. Thus, BMP could retain any proceeds essentially derived from fraud. Saunders J.A. awarded BMP nominal damages of $1 for BNS’s reversal of the credit over BMP’s opposition (paras. 30 and 51) plus the remaining $100 from the bank draft, and dismissed the cross-appeal on punitive damages.

[14] As to the funds traced in the related accounts, Saunders J.A. found that the transfers were proper and that the cheques were actual bills of exchange, unlike the forged cheque. Absent a finding that the cheques in question were improper, BNS was entitled only to “a remedy of tracing, or an enquiry into the true ownership of the accounts” (para. 56). The appeals against 636651 B.C. Ltd., Hashka and Backman were thus dismissed.

[15] BMP appeals the Court of Appeal’s reversal of the trial judge’s conclusion on damages and also asks for punitive damages. BNS cross-appeals on the issue of tracing in the related accounts. It seeks the reversal of the Court of Appeal’s decision and of the trial judge’s damages award in favour of the holders of the related accounts.

3. Positions of the Parties

[16] BMP asks that the award of damages be restored. It argues that, whether the claim is viewed as one for debt or for damages for breach of contract, BNS’s liability is the same: “It is not necessary for BMP to prove that it suffered a loss, other than the loss of its right to demand repayment of [the amount credited to] its account [at] BNS” (A.F., at para. 82). BMP also asks for punitive damages to sanction BNS for its conduct.

[17] BNS takes the position that BMP never had any interest in the proceeds of the forged cheque and that it is not entitled to damages, whether general or punitive, resulting from BNS’s decision to return the funds to the victim of the fraud. BNS asserts what is essentially a defence in rem, relying on the inherent nullity of an instrument bearing the forged signatures of the drawer. It argues that this defence suffices for it to resist BMP’s claim. In addition, BNS appeals the decision on the tracing of the funds in the related accounts on the basis that those funds were clearly identified as proceeds of the forged cheque and that none of the parties involved gave any consideration or suffered any detriment. BNS does not contest the $13.50 awarded as damages by the trial judge in relation to a late-payment charge Backman had to pay to a third party.

[18] As the Court of Appeal mentioned, the case would have been simpler had only one bank been involved. However, in my view, BNS was not precluded from acknowledging that RBC could rely on the well-established doctrine of mistake of fact. Moreover, the conditions for tracing the funds in the related accounts are, in my view, met.

[19] In sum, this case is about the restitution of amounts paid by RBC by mistake and the right to trace the proceeds. Since the case can be resolved by applying the common law rules on mistake of fact, I will begin by reviewing those rules. I will then apply the rules to the facts, and in doing so I will explain how the rules apply in the context of the relationship between the drawee and the collecting bank and between the customer and the bank; this will require a further discussion of the common law inasmuch as it has not been changed by the Bills of Exchange Act, R.S.C. 1985, c. B‑4 (“BEA”). Finally, I will explain why, in my view, BNS could resist the claims of BMP and the holders of the related accounts.

4. Analysis

[20] In Bank and Customer Law in Canada (2007), M. H. Ogilvie writes (at p. 284):

[B]anks make payments by mistake for a variety of reasons, including simple error, either personal or by computer, in making a payment more than once, payment over an effective countermand, payment where there are insufficient funds, or payment of a forged or unauthorized cheque. Prima facie, in these situations, with the exception of insufficient funds which is treated as an overdraft, the bank is liable to reimburse the customer’s account because it is in breach of contract with the customer. But the bank is also permitted to look to the recipient of the mistaken payment for restitution of the sum paid under a mistake of fact.

[21] That a bank has a right to recover from a recipient a payment made under a mistake of fact was made clear in a restatement of the law by Goff J. (as he then was) in Barclays Bank Ltd. v. W. J. Simms Son & Cooke (Southern) Ltd., [1979] 3 All E.R. 522 (Q.B.), at p. 541. Canadian courts have long recognized that right on the basis of the analytical framework adopted in Royal Bank v. The King, 1931 CanLII 304 (MB KB), [1931] 2 D.L.R. 685 (Man. K.B.). Since Simms, however, and I agree with this approach, many Canadian courts have relied on the English case as setting the conditions for recovery in restitution by a bank, subject to Canadian law with respect to change of position, an issue that will be discussed below: Royal Bank of Canada v. LVG Auctions Ltd. (1983), 1984 CanLII 1921 (ON CA), 43 O.R. (2d) 582 (H.C.J.), aff’d (1984), 1984 CanLII 3074 (ON CA), 12 D.L.R. (4th) 768 (Ont. C.A.); Toronto-Dominion Bank v. Pella/Hunt Corp. (1992), 1992 CanLII 7429 (ON SC), 10 O.R. (3d) 634 (Gen. Div.); A.E. LePage Real Estate Services Ltd. v. Rattray Publications (1994), 1994 CanLII 1506 (ON CA), 120 D.L.R. (4th) 499 (Ont. C.A.), at p. 507: “Barclays Bank v. Simms is the accepted authority explaining the obligations of a bank to its customer and its redress against the payee of a cheque who appears to be taking advantage of an innocent mistake on the part of a bank employee”; Central Guaranty Trust Co. v. Dixdale Mortgage Investment Corp. (1994), 1994 CanLII 1429 (ON CA), 24 O.R. (3d) 506 (C.A.), at p. 512, fn. 1; Ogilvie, at p. 285; P. D. Maddaugh and J. D. McCamus, The Law of Restitution (loose‑leaf), at p. 10‑32.

4.1 Simms Test for Recovering Money Paid Under a Mistake of Fact

[22] The test laid down in Simms for recovering money paid under a mistake of fact (at p. 535) is straightforward:

1. If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact.

2. His claim may however fail if: (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; (c) the payee has changed his position in good faith, or is deemed in law to have done so.

[23] The right of BNS to resist the claims of the appellant and the cross-respondents cannot be examined without regard to RBC’s right to ask BNS to transfer the funds. Consequently, RBC’s position is the starting point for the analysis.

4.2 Application of the Test

4.2.1 Prima Facie Right to Recover

[24] On the first step of the Simms test, RBC has a prima facie right to recover. It is common ground that payment was made on the basis of a forged instrument. According to s. 48(1) BEA, a forged signature is wholly inoperative. It does not create a right to give a discharge for the bill or to enforce payment. RBC made the payment before discovering that the drawer’s signatures were forged. BMP no longer disputes the fact that the instrument is a forgery, but it contends that RBC must bear the loss and that BNS was not entitled to restrain the funds and transfer them to RBC. This argument goes to the second step of the test. At the first step, there is no basis for denying that RBC has a prima facie right to recover the funds.

4.2.2 Right of the Payee to Keep the Proceeds, Consideration and Change of Position

[25] I reiterate that the second step of the test involves three enquiries: (1) Did the payor intend that the payee keep the money in any event or is the payor precluded by law from raising the mistake? (2) Did the payee give consideration? (3) Did the payee change its position?

4.2.2.1 Right to Keep the Proceeds

[26] In the first enquiry, the question is whether the payor intends or is deemed in law to intend the payee to receive the funds. In the case at bar, the drawee provided the funds under the mistaken assumption that the drawer’s signatures were genuine. It is not in dispute — and is well settled in law — that RBC, as the drawee, had no right to pay the cheque out of the funds it held to the credit of First National, the purported drawer, and that RBC would be liable to reimburse its customer if it used the customer’s funds to make the payment. Nor is the relationship between BNS and RBC in dispute. It is that of a collecting bank receiving funds from the drawee in order to remit them to the payee. The issue before the Court in this case is whether, as BMP argues, the loss must fall on the drawee bank.

[27] Where a drawee provides funds to a collecting bank on presentation of an instrument bearing a forged signature of the drawer, the drawee will usually — unless a specific factual context dictates otherwise — be in a position to assert that it did not intend the payee to keep the funds. As I mentioned above, the drawee in this situation pays without the authority to do so and is liable to its customer, who has not signed as the drawer. Without such an instruction from the drawer, the payor cannot be said to have intended the payee to keep the money in any event. This is not a case where a party pays a debt it owes or where other similar circumstances preclude the payor from denying that it intended the payee to keep the funds.

[28] However, whether the payor is deemed in law to intend that the payee keep the money requires further elaboration. BMP put forward three arguments in support of its claim. The first is that the principle of finality of payment forms part of the common law and that it prevents the drawee bank from recovering the paid proceeds of a forged cheque from anyone other than the forger. The second is that the scheme of the BEA does not allow RBC to recover from BNS or BMP. The third is that the service agreement between BNS and BMP precludes BNS from recovering such proceeds from BMP.

4.2.2.1.1 Principle of Finality of Payment

[29] In Canadian law, the argument that the drawee should bear the loss is sometimes said to have originated in Bank of Montreal v. The King (1907), 1907 CanLII 29 (SCC), 38 S.C.R. 258. I will turn to that case in a moment, but since the two judges (Girouard J., with whom Maclennan J. concurred) who supported the principle of finality relied heavily on the older case of Price v. Neal (1762), 3 Burr. 1354, 97 E.R. 871, I will begin by discussing the latter.

[30] In Price v. Neal, a drawee paid a first bill of exchange bearing a forged signature of the drawer. He then accepted a second, also bearing a forged signature of the drawer. After that acceptance, the bearer discounted the second bill, which the drawee eventually paid. A considerable amount of time elapsed before the drawee found out that the signatures on both bills were forged. Lord Mansfield held that the drawee was not entitled to recover in such a case.

[31] Price v. Neal has been interpreted in various ways over the centuries. One of the interpretations serves as a basis for a broad statement that the principle of finality of payment requires the drawee to bear the loss where the drawer’s signature is forged, irrespective of detrimental reliance (see S. A. Scott, “Comment on Benjamin Geva’s Paper: ‘Reflections on the Need to Revise the Bills of Exchange Act — Some Doctrinal Aspects’” (1981-82), 6 Can. Bus. L.J. 331 (“Comment on Reflections”), at p. 342). A second interpretation of Price v. Neal is that the drawee cannot rely on the forgery after acceptance (or payment) of a bill bearing a signature he should know to be forged or is deemed to have negligently omitted to verify. Yet a third interpretation put forward for Price v. Neal limits its scope to instances where two innocent parties have equal equities but the holder of the bill has legal title to the money (see Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548 (H.L.); B. Geva, “Reflections on the Need to Revise the Bills of Exchange Act — Some Doctrinal Aspects: Panel Discussion” (1981-82), 6 Can. Bus. L.J. 269 (“Reflections”), at pp. 308-9; J. S. Ziegel, B. Geva and R. C. C. Cuming, Commercial and Consumer Transactions: Cases, Text and Materials (3rd ed. 1995), vol. II, at p. 396, citing J. B. Ames, “The Doctrine of Price v. Neal” (1891), 4 Harv. L. Rev. 297, at pp. 297-99). In view of the various interpretations of Price v. Neal, I do not accept that it provides a basis for an unqualified rule that a drawee will never have any recourse against either the collecting bank or the payee where payment has been made on the forged signature of the drawer.

[32] In Canada, Bank of Montreal v. The King is sometimes relied on in support of the principle of finality of payment. Upon closer examination, however, it cannot be said to stand for a hard and fast rule that the drawee is in all circumstances precluded from recovering from the collecting bank. First, the judges in Bank of Montreal v. The King who invoked Price v. Neal as having endorsed the principle of finality of payment did not discuss the third interpretation of that case. Second, the other judges who wrote in Bank of Montreal v. The King took a far more nuanced approach to the problem of the forged signature of the drawer.

[33] In Bank of Montreal v. The King, the bank had honoured cheques bearing the forged signatures of officers of the Government of Canada. As the Government of Canada had not authorized the payments, it sought to recover the amounts of the forged cheques from the Bank of Montreal. The Bank of Montreal in turn took action against the collecting banks to recover the amounts they had received as a result of the forged cheques. Four different judges wrote reasons. All of them concluded that the drawee, the Bank of Montreal, had to return the funds to the drawer, the Government of Canada. All of them also rejected the claim against the collecting banks, although the reasons they gave cannot easily be categorized.

[34] Three of the five judges in Bank of Montreal v. The King (Davies, Idington and Duff JJ.) were of the view that if the position of a collecting bank is altered, that bank can resist a claim by the drawee. Two of the judges (Davies and Idington JJ.) explicitly rejected Girouard J.’s adoption of the argument, based on Price v. Neal, of presumed or actual negligence on the drawee’s part and the third (Duff J.) did not pronounce on it. Therefore, to argue that there is a clear rule that the drawee must suffer the loss is not supported by what is labeled as the fons et origo of the Canadian precedents on forged instruments. In addition, the fact that the Canadian courts subsequently embraced Simms also weakens the finality of payment argument significantly in a case involving payment of an instrument bearing a forged signature.

[35] The assessment of the drawee’s rights requires a more nuanced enquiry. The principle of finality of payment underlies both the common law rules and the BEA’s provisions and serves as a general goal, but as laudable as it is, it does not negate rights that may otherwise accrue to a party. It cannot be raised by a payee as an indiscriminate bar to the recovery of a mistaken payment. I agree with Scott, “Comment on Reflections”, at p. 342, that:

[N]o very convincing reason can be offered for refusing the drawee relief in the single instance where the mistake involves acceptance or payment on a forged drawer’s signature, whilst relief is freely given to the drawee on all other acceptances or payments by mistake (including indeed various other kinds of forgeries; even the case where the drawer’s own endorsement is forged on a bill payable to his order (s. 129(b)) [now s. 128(b)].

4.2.2.1.2 Provisions of the BEA

[36] On the issue of whether the payor is deemed in law to intend that the payee keep the money, two provisions of the BEA warrant comment: ss. 128(a) and 165(3). These provisions are relevant in view both of BNS’s role as BMP’s agent for the purposes of collection on the instrument, and of the special status granted to a bank that receives an unendorsed cheque.

[37] Section 128(a) BEA reads as follows:

128. [Estoppel] The acceptor of a bill by accepting it is precluded from denying to a holder in due course

(a) the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the bill;

[38] In the instant case, the drawee (RBC), in requesting restitution from the collecting bank (BNS), was in fact denying to both the collecting bank and the payee the genuineness of the drawer’s signatures. Consequently, the question is whether the payee and the collecting bank were holders in due course and therefore entitled to rely on s. 128(a) BEA. I will discuss the payee’s situation first, because the collecting bank has a special status which, in this case, is governed by s. 165(3), to which I will turn below.

[39] The most common view is that a payee is not, as a general rule, a holder in due course because he or she has not acquired the instrument by way of negotiation (s. 55(1)(b) BEA). Yet in some factual circumstances, dealings may take place before the payee becomes the holder of the instrument, and some commentators consider that the negotiation requirement needs to be revisited: Geva, “Reflections”, at pp. 289 ff.; see also St. Martin Supplies Inc. v. Boucley, [1969] C.S. 324. This question need not be resolved for the purposes of the present case, however. It is another requirement for qualifying as a holder in due course under s. 55(1)(b) BEA that is lacking here: BMP did not take the instrument for value, so it was not a holder in due course. Since only a holder in due course can benefit from s. 128(a) BEA, even if RBC were deemed — by payment — to have accepted the forged cheque, it would not be precluded from denying to BMP the genuineness of the drawer’s signatures.

[40] The other provision that is relevant to RBC’s right to recover the money it paid by mistake from BNS is s. 165(3) BEA. This provision reads as follows:

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.

[41] According to this provision, BNS acquired the status of a holder in due course by receiving the cheque from the payee and crediting the amount to the payee’s account. Section 165(3) BEA deems the collecting bank to be in the same position as a party who has taken the bill free from any defect of title of prior parties. It has the same right as a party who has given consideration. Consequently, it can be argued that if BNS had chosen to do so, it could have refused to transfer to RBC the money it held on account of the fraudulent instrument. However, the question is not whether it could rely on the protection of s. 165(3) BEA, but whether it could restore the funds to RBC.

[42] Section 165(3) BEA has been commented on many times. Parliament was initially criticized for acting at the request of the banking industry without understanding the potentially wide scope of the amendment (see S. A. 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). Then, following Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727, Ogilvie expressed the view in Bank and Customer Law in Canada, at p. 295, that the effect of the Court’s narrow interpretation of s. 165(3) has been to make the collecting bank the drawer’s insurer. The least that can be said is that the interpretation of the scope of s. 165(3) BEA is taking shape.

[43] No prior case has concerned the effect s. 165(3) BEA will have where the deposited instrument bears a forged signature of the drawer. In Boma, at para. 43, Iacobucci J. explicitly refrained from discussing the applicability of the defence available to the collecting bank in circumstances where the instrument might be found not to be a bill of exchange. Although I have serious doubts about the soundness of an argument which would deprive the collecting bank of all protection on the basis that the instrument is a sham, not a cheque, I need not discuss it here in view of my position that the collecting bank is not required to rely on the protection potentially afforded by s. 165(3) BEA.

[44] As Ogilvie clearly points out:

Section 165(3) is drafted in broad terms, with the obvious policy of protecting a bank from liability in relation to cheques deposited in a customer’s account by permitting a bank to presume that it was the drawer’s intention that the payee receive the proceeds of the cheque, in complete contrast to the earlier law, where a bank enjoyed no such presumption. [pp. 292-93]

[45] Section 165(3) BEA affords protection to a bank. The bank is not obligated to rely on this protection when restitution is claimed from it. The payee stands as a third party with respect to the protection. He or she cannot use the bank’s shield as a sword against it. The purpose of granting the bank the status of a holder in due course is not to create an entitlement for the payee of a forged instrument. The payee may benefit from defences that are inherent in the rules on mistake of fact, but not from the protection afforded to a bank by s. 165(3) BEA. In other words, if the forged instrument were held to be a bill of exchange, BMP could not argue, for the purposes of the Simms test, that BNS was deemed in law to be entitled to receive the funds irrespective of the validity of the drawer’s signatures.

4.2.2.1.3 The Service Agreement

[46] BMP also argued, and the trial judge agreed, that BNS was not entitled to restrain the funds and transfer them to RBC because the service agreement governing the contractual relationship did not authorize this.

[47] Historically, a contract governing a bank account consisted mainly of implied terms: Bank of Montreal v. Attorney General of Quebec, 1978 CanLII 173 (SCC), [1979] 1 S.C.R. 565, at p. 569 (per Pratte J.), citing Joachimson v. Swiss Bank Corp., [1921] 3 K.B. 110 (C.A.), at p. 117 (per Bankes L.J.). Those terms were developed by the common law courts, and some of them were later codified in what is now the BEA.

[48] Today, most bank account agreements, including the service agreement between BMP and BNS, are standard form contracts. However, terms may still be implied: Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC), [1987] 1 S.C.R. 711, at pp. 776-77; G. R. Hall, Canadian Contractual Interpretation Law (2007), at p. 125. In the instant case, BMP argues that under the service agreement, BNS could charge back only the credits for which it had not received settlement. According to BNS, nothing in the service agreement precluded it from returning the funds to RBC and resisting the claim for damages.

####### 4.2.2.1.3.1 The Provisional Payment Clause

[49] The service agreement contains provisions under which amounts may be charged back in certain circumstances. Clause 4.7 reads as follows:

4.7 You authorize us to charge the following to any of your accounts, even if they are not specifically designated for the instruction or service:

· the amount you ask us to pay in any instruction

· the amount of any instruction we have paid to you or credited to your account and for which we do not receive settlement for any reason (including fraud, loss or endorsement error) together with all related costs

· payment of any amount you owe us, including fees, charges, costs and expenses.

[50] The right to charge back provisional credits when a customer’s instruction to collect on a bill cannot be carried out has long been recognized at common law. Clause 4.7 clarifies that right but does not rule out other reversals of credit that are available at common law. Clause 4.7 gives the bank an explicit right to charge back amounts credited to the customer’s account if an instrument is not settled. In the context of the service agreement, it is clear that the settlement referred to in this clause is the receipt of the funds through the banking system, and more particularly through the clearing mechanism available to members of the Canadian Payments Association.

[51] The trial judge seems to have understood the doctrine of mistake of fact to be limited to provisional credits or, in other words, to situations where the collecting bank has not received the funds. This is not so. As a matter of fact, both the seminal cases of Bank of Montreal v. The King and Royal Bank v. The King, to which I referred above, concerned forgeries discovered long after the forged cheques had been paid. In Royal Bank v. The King, the drawee bank was held to be entitled to claim the amounts of the cheques from the payee, who was also its customer. Royal Bank v. The King shows that a bank is not necessarily precluded from claiming funds from the payee long after the instrument has been cleared.

[52] The doctrine of mistake of fact is so ingrained in our law that it can be seen as an implied term of the contract. This is even more true in the case at bar, as a clause of the service agreement explicitly provides that BNS retains its rights under “any law”. Clause 17.3 reads as follows:

17.3 This agreement takes precedence over any other agreement, service request or service materials relating to any instruction or services. However, we retain all our rights under any law respecting loans, set-off, deposits and banking matters even if they are not described in this agreement.

[53] Although the restraint of the funds by BNS could not be based on clause 4.7, since BNS had received settlement from RBC, the contract does not preclude the application of the common law where a payment has been made under a mistake of fact. Rather, the common law is implicitly incorporated, since it does not conflict with the explicit terms of the contract. Thus, clause 4.7 is not a bar to applying the common law to the relationship between BNS and BMP where BNS’s role is no longer that of a collecting bank.

####### 4.2.2.1.3.2 The Clearing Rules

[54] In concluding that BNS did not have the right to restrain the funds and transfer them to RBC, the trial judge interpreted the service agreement as incorporating the clearing rules of the Canadian Payments Association. Cohen J. held that “the Agreement specifically refers to, and incorporates the time limit set out in the [clearing] [r]ules” (para. 292). With respect, I do not agree that the clearing rules are an obstacle to recovery.

[55] The clearing rules themselves provide for the survival of the members’ common law rights. Clause 1(b) of Rule A4 allows a negotiating bank to seek recourse outside the clearing system:

Nothing in this Rule precludes a Drawee or a Negotiating Institution from exercising its rights and seeking recourse outside of the Clearing.

Moreover, the preamble to the rules contains an express disclaimer of application to third parties:

Nothing in the Rules shall affect or be interpreted to affect the rights or liabilities of any party to any Payment Item, except as expressly provided in the Rules.

[56] It is also recognized in the authorities that the clearing rules apply only to relations between members of the Canadian Payments Association and that they do not create entitlements for third parties. As B. Crawford states in Payment, Clearing and Settlement in Canada (2002), vol. 1, at p. 168:

. . . it must be abundantly clear in principle that the ACSS Rules, being internal documents of a corporation, may legitimately govern the relations of the members of the corporation but cannot place burdens on members of the public or bestow benefits on them in connection with their use of the CPA’s clearing and settlement system.

[57] I agree with the following statement by Evans J.A. in National Bank of Greece (Canada) v. Bank of Montreal, 2000 CanLII 16791 (FCA), [2001] 2 F.C. 288 (C.A.), at para. 19:

This system operates only at the level of banking and similar institutions, and . . . decisions of the compliance panel have no impact on either the private law rights and duties of banks, their customers, and the payers and payees of cheques, or the remedies available to enforce them.

(See also Bank of Nova Scotia v. Regent Enterprises Ltd. (1997), 1997 CanLII 14711 (NL CA), 157 Nfld. & P.E.I.R. 102 (C.A.), at para. 38; Toronto‑Dominion Bank v. Dauphin Plains Credit Union Ltd. (1992), 1992 CanLII 8581 (MB QB), 90 D.L.R. (4th) 117 (Man. Q.B.), at p. 121, rev’d on other grounds (1992), 1992 CanLII 8544 (MB CA), 98 D.L.R. (4th) 736 (Man. C.A.), leave to appeal to SCC refused, [1993] 2 S.C.R. vii.)

[58] Finally, I disagree with the trial judge that the service agreement governing the relationship between BNS and BMP incorporated the clearing rules for BMP’s benefit. The trial judge based this conclusion on his analysis of clauses 4.1, 4.3, 4.4 (para. 296) and 4.7 (para. 297), as well as on the testimony of the branch manager, who stated: “[The service agreement] uses — That’s correct. It used the clearing settlement system” (para. 291). This statement supports the fact that BNS “used” the clearing system. However, it does not mean that the rules were incorporated into the service agreement. Clauses 4.1, 4.3 and 4.4, to which the trial judge referred, read as follows:

4.1 You are responsible for settling payment of your instructions. Unless you have made specific arrangements with us, you will ensure that your accounts have sufficient cleared funds to settle any instructions at the time that you give us an instruction. We are not required to settle an instruction if sufficient cleared funds are not available in your account. The reported balances for your account may include amounts which are not cleared funds. Cleared funds means cash or any funds from any deposit which have been finally settled through the clearing system.

4.3 You acknowledge that we must clear instructions using a clearing system and are bound by the rules of any clearing system we use, including rules for endorsement of instructions, identity of payee and the time for final settlement. These rules affect our ability to honour your request to cancel instructions and the procedures we must follow to settle your instructions and clear funds for you.

4.4 We reserve the right to clear and transfer instructions by whatever method we choose, whether they are drawn on your account or negotiated by you. You grant us sufficient time to settle all instructions. You acknowledge that we may delay crediting your account until we receive the cleared funds for the instruction.

[59] Clause 4.1 is a restatement of the bank’s common law obligation to honour its customer’s cheques and instructions when the customer has sufficient credit. Under clause 4.3, BMP acknowledged that BNS was bound by the clearing rules. The only consequence of this acknowledgment was that BMP would be precluded from claiming a breach of the agreement if a failure by BNS to honour its instructions was justified by the clearing rules BNS must abide by in dealing with other banks. Clause 4.4 essentially gave BNS three types of rights: (1) to clear instructions in whatever way it chose; (2) to take sufficient time to settle instructions; and (3) to take sufficient time to credit the account. Clause 4.4 was silent as to whether the “credit” ever became a final and irreversible credit to BMP’s account. It may be that the restraint of the funds by BNS was based on no express provision, but it is clear that the clearing rules were neither expressly nor implicitly incorporated for BMP’s benefit.

[60] In summary, the trial judge could not rely on the clearing rules to arrive at the conclusion that BMP had a right to the proceeds of the forged cheque. Consequently, I find that the first answer at the second step of the Simms test is that RBC did not intend and is not deemed in law to have intended that BMP receive the funds. Two other enquiries remain: whether consideration was given and whether a change of position occurred.

4.2.2.2 Consideration

[61] The question whether BMP has given consideration is easily answered in light of the trial judge’s finding of fact that BMP gave no value for the instrument. At the same time, BMP’s position that RBC should bear the loss entails an implicit acknowledgment that neither itself nor BNS has given consideration for the instrument.

4.2.2.3 Change of Position

[62] The question in the third enquiry is whether the payee has changed its position. In Simms, the condition that money cannot be recovered in the event of a change of position was seen to be linked to the defendant’s being deprived of an opportunity to give a notice of dishonour. This prompted comments that the defence of change of position is more specific than the label would suggest: Geva, “Reflections”, at pp. 308 ff. However, leading English commentators on the subject now observe that the law has evolved and may now include defences of change of position that are not related to the BEA’s notice requirements: Lord Goff and G. Jones, The Law of Restitution (6th ed. 2002), at p. 852; see Lipkin Gorman v. Karpnale Ltd. Similarly, leading Canadian commentators consider that since Rural Municipality of Storthoaks v. Mobil Oil Canada, Ltd., 1975 CanLII 156 (SCC), [1976] 2 S.C.R. 147, the defence of change of position has been “an established feature of the Canadian law of mistaken payments”: Maddaugh and McCamus, at p. 10-35, §10:500.10; see also G. H. L. Fridman, Restitution (2nd ed. 1992), at p. 458. I see no reason why the general defence of change of position should not apply to mistaken payments made on forged cheques.

[63] To conduct the change of position enquiry, it is necessary to determine whether the payee parted with the funds. In this case, BNS, as the collecting bank, received the funds from RBC for the benefit of the payee, BMP, and credited BMP’s account. Once the collecting bank receives the funds from the drawee and credits the payee, its role as a collecting bank is terminated. It then becomes the holder of the funds under its contract with its customer. It is settled law that a customer is a creditor of the bank when he or she deposits funds into an account and that the bank holds these funds as its own until the customer asks for repayment. This principle has gone unquestioned since Foley v. Hill (1848), 2 H.L.C. 28, 9 E.R. 1002. See Crawford and Falconbridge: Banking and Bills of Exchange (8th ed. 1986), vol. 1, at pp. 742‑43; Ogilvie, at p. 179.

[64] Thus, although BNS’s role was changed from that of a collecting bank to that of a borrower, for the purposes of the change of position analysis, it must be concluded that BNS remained the holder of the funds. Moreover, at the time they were restrained, the funds now claimed by BMP were still credited to its account. Therefore neither BNS as the holder of the funds nor the payee had changed its position.

[65] In conclusion, BMP had not changed its position and the defence was available neither to it nor to BNS. It is worth noting that cases in which a person who is not a party to the fraud has neither given consideration nor changed its position will be rare. However, that is what has happened here according to the facts found by the trial judge. In these circumstances, all the conditions for recovery of the payment made by mistake are met. Other objections have been made, though, and I will discuss them now.

4.3 Jus Tertii Defence, Self-Help Arguments and Policy Considerations

[66] The trial judge found that it was wrong for BNS to transfer the funds to RBC. He was of the view that BNS had favoured a bank to its customer’s detriment. In his opinion, BNS was not entitled to exercise any of the rights that could have been exercised by RBC.

[67] The jus tertii argument the trial judge relied on could be accepted only if RBC had no right to recover the funds from BNS. Only then could BNS be said to have acted in RBC’s stead. Since I have concluded that BNS was entitled to give effect to RBC’s claim for restitution of the moneys paid under mistake of fact, the jus tertii argument fails. This is the result of the application of the law to the highly singular facts of this case.

[68] It is worth recalling some of the extremely unusual circumstances of this case: the sale price of the unlicensed distributorship was arrived at by “pulling the number out of the air”, the cheque was received without a cover letter, the names of the sender and the drawer of the cheque were unknown, Newman, the purchaser, could not be reached and the payee had given no consideration. The fraud could not be clearer, nor could the origin of the funds. In my view, since the rightful owner had a legitimate claim against the recipient, BNS had no duty to give preference to BMP.

[69] The funds received by BNS were RBC’s own funds and RBC had no right to be repaid out of First National’s account. BNS acted in a way that could have enabled the parties to avoid going through a series of judicial proceedings. This Court’s reasoning in Bank Canadian National v. Gingras, 1977 CanLII 220 (SCC), [1977] 2 S.C.R. 554, at p. 564, applies with equal force here. BNS asked BMP for support in recovering the proceeds of the forged cheque. BMP insisted on retaining the funds even though it had given no consideration for them and even though the fraud was beyond dispute. In this case, BNS’s actions entailed no risk of curtailing the protection from which a holder in due course is entitled to benefit.

[70] Furthermore, BMP objected to the joinder of the action RBC had eventually instituted against BMP, which was pending at the time this case was heard. It might have been easier for the trial judge to assess the parties’ rights had the two proceedings been joined. In these circumstances, the argument that BNS had exercised a third party right or resorted to a self-help remedy not only sounds hollow and opportunistic, but is procedurally unfounded.

[71] I can conceive of no policy consideration that would preclude BNS from responding to RBC’s common law right in this case. As I mentioned above, neither Price v. Neal nor Bank of Montreal v. The King stands for a strict rule that the drawee must in all circumstances bear a loss resulting from a cheque bearing a forged signature of the drawer. There is no rule preventing RBC or BNS from arguing that the payment to BMP was made by mistake. The commentators find no convincing reason to establish an absolute rule against relief in the case of payment on the drawer’s forged signature (B. Geva, “Conversion of Unissued Cheques and the Fictitious or Non-Existing Payee — Boma v. CIBC” (1997), 28 Can. Bus. L.J. 177, at p. 189; Scott, “Comment on Reflections”, at p. 342).

[72] At common law, the principle of finality of payment must be balanced against the right of the owner of the funds to recover money paid under a mistake of fact. The common law affords a defence to an innocent party who has given consideration or changed his or her position. However, the person who is still in possession of the funds is in the best position to stop the fraud. To preclude means to prevent the continuation of a fraud in order to allow a fraudulent payment to be finalized would be a strange policy. Thus, there is no overarching policy consideration that would bar the payee’s bank from resisting a claim based on a signature that has been proven to be forged where the payee has not used the funds and has neither given consideration for them nor changed his or her position.

[73] The trial judge was of the view that BMP and the holders of the related accounts had “suffered a loss of their right to demand repayment from the BNS of the BNS’ debt to them by reason of the BNS’ wrongful charge backs against their respective bank accounts” (para. 423). In my view, BNS was entitled to object that since the cheque was forged, the funds could be and were returned to their rightful owner. The deposit of the forged instrument could not result in a debt to BMP in this case. Therefore, BMP did not lose anything because the funds had to be returned to RBC. The trial judge’s conclusion that BMP had lost the right to demand payment of a debt owed by BNS is erroneous, because the credit entry in the account had been made by mistake.

[74] I have found that RBC made a mistaken payment, that nothing precluded it from recovering the funds and that BMP had no defence to the claim. More particularly, BNS was entitled not to raise a defence based on s. 165(3) BEA. RBC, in trying to trace the sums it had mistakenly paid, was informed that a portion amounting to over $776,000 was being held by BNS at the time the fraud was discovered. An amount of $350,188.65 was still in BMP’s account. BNS also restrained funds in the related accounts. The question the Court must now answer is whether the rules of evidence are a bar to restitution. I will now discuss this issue.

4.4 Right to Claim the Amounts in BMP’s Account and to Trace Funds in the Related Accounts

[75] Tracing is an identification process. The common law rule is that the claimant must demonstrate that the assets being sought in the hands of the recipient are either the very assets in which the claimant asserts a proprietary right or a substitute for them.

[76] In the instant case, RBC’s funds were first transferred through the clearing system to BNS in its capacity as collecting bank — and thus as agent — for BMP. BNS then made the entry in BMP’s account to reflect the receipt of the funds from RBC. Finally, BMP made withdrawals from its account by way of transfers or cheques for deposit in the related accounts and, in the case of the transactions involving the $300,000 cheque, back to its own account. What is at issue here is a non-specific fund.

[77] Under ordinary circumstances, an agent cannot be sued in the principal’s stead. However, as stated by Lord Goff and Jones in The Law of Restitution, at p. 847, citing British American Continental Bank v. British Bank for Foreign Trade, [1926] 1 K.B. 328 (C.A.),

where the agent has paid the money over to his principal but has received it back again so that his position is as it was before he paid it over, he must make restitution.

Save for the $100 added to the bank draft, there is no issue of identification of the money in BMP’s account. The unchallenged evidence is that it comes from the funds received from RBC. BNS, as agent, received the funds from RBC and, after crediting them to its principal, BMP, received them back under the banking contract. Having received the funds back, BNS had to make restitution to RBC. Therefore, BNS has a valid defence against BMP (see Bavins, Junr. & Sims v. London and South Western Bank, Ltd., [1900] 1 Q.B. 270 (C.A.)). BNS’s status with respect to the funds in the related accounts is different. BNS was not acting as agent of the holders of the related accounts. A review of the rules on tracing will therefore be helpful.

[78] It has been accepted that the English case of Agip (Africa) Ltd. v. Jackson, [1992] 4 All E.R. 451 (C.A.) (aff’g [1992] 4 All E.R. 385 (Ch.)), has been accepted as setting out rules with respect to tracing of money: Citadel General Assurance Co. v. Lloyds Bank Canada, 1997 CanLII 334 (SCC), [1997] 3 S.C.R. 805.

[79] According to the Court of Appeal in Agip, tracing at law is permitted where a person has received money rightfully claimed by the claimant. Liability is based on mere receipt, and the extent of liability will depend on the amount received (Agip (C.A.), at pp. 463‑64; Agip (Ch.), at p. 399; Banque Belge pour l’Étranger v. Hambrouck, [1921] 1 K.B. 321 (C.A.)). It is sometimes said that funds cannot be traced to bank accounts at common law. This view overstates the rule and fails to take into account the fact that, as an evidentiary process, tracing is possible if identification is possible (see D. R. Klinck, “‘Two Distincts, Division None’: Tracing Money into (and out of) Mixed Accounts” (1988), 2 B.F.L.R. 147, at p. 148, and L. D. Smith, The Law of Tracing (1997), at pp. 183 ff.). Indeed, no statement that tracing is impossible can be found in the case that is most often cited in support of the theory that funds cannot be traced to bank accounts at common law. If Lord Ellenborough C.J.’s comment in Taylor v. Plumer (1815), 3 M. & S. 562, 34 E.R. 721, is read in its entirety, it is clear that tracing is impossible only when the means of ascertainment fail:

It makes no difference in reason or law into what other form, different from the original, the change may have been made, whether it be into that of promissory notes for the security of the money which was produced by the sale of the goods of the principal, as in Scott v. Surman, Willes, 400, or into other merchandize, as in Whitecomb v. Jacob, Salk. 160, for the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description. The difficulty which arises in such a case is a difficulty of fact and not of law, and the dictum that money has no ear‑mark must be understood in the same way; i.e. as predicated only of an undivided and undistinguishable mass of current money. [Emphasis added; p. 726.]

[80] That it is possible at common law to trace money to bank accounts is illustrated by the cases of Hambrouck and Agip. In Hambrouck, a man named Hambrouck had fraudulently procured cheques drawn on the Banque Belge pour l’Étranger. He endorsed the cheques and deposited them in his account at Farrow’s Bank. The cheques were cleared through the banking system and credited to Hambrouck’s account. “In substance no other funds were paid into the account than the proceeds of these forged cheques” (Atkin L.J., at p. 331 (emphasis added)). Hambrouck then paid money out of that bank account to a Ms. Spanoghe, with whom he was living. A deposit was made in Ms. Spanoghe’s account at the London Joint City and Midland Bank and, according to Atkin L.J., “[n]o other sums were at any time placed to that deposit account” (p. 332). On the basis of those facts, Bankes and Atkin L.JJ. were both of the opinion that the funds could be traced at common law to Ms. Spanoghe’s account (pp. 328 and 335-36). Two points drawn from that case are important for our purposes: neither the fact that a cheque is cleared through the banking system before being deposited in the payee’s account nor the fact that the payee has mixed the funds with other funds is sufficient to bar recovery at common law.

[81] To fully understand the parallel between Hambrouck and Agip, it is important to follow the sequence of events in the latter case. In Agip, the Banque du Sud (“BdS”) in Tunis received a payment order of $518,822.92 in favour of Baker Oil. BdS instructed Citibank to debit its account and credit an account at Lloyds Bank. Lloyds Bank credited Baker Oil’s account before receiving the funds from Citibank, thereby assuming the delivery risk. The next day, pursuant to instructions from accountants Jackson & Co., who controlled Baker Oil on behalf of their clients, Lloyds Bank transferred the funds to Jackson & Co.’s account. At the time the credit was entered in Baker Oil’s account, there was no other money in the account; however, the balance of Jackson & Co.’s account was US$7,911.80 before the transfer. The Court of Appeal agreed with the trial judge that the mixing of the funds with the amount already in Jackson & Co.’s account was of no consequence and did not preclude tracing (pp. 465‑66). In first instance, Millett J., as he then was, had stated in Agip, at p. 399:

A fortiori it can be no defence for [Jackson, a partner of Jackson & Co.] to show that he has so mixed it with his own money that he cannot tell whether he still has it or not. Mixing by the defendant himself must, therefore, be distinguished from mixing by a prior recipient. The former is irrelevant, but the latter will destroy the claim for it will prevent proof that the money received by the defendant was the money paid by the plaintiff. [Emphasis added.]

[82] In Agip, the time when the funds the plaintiff sought to trace ceased to be identifiable was when Lloyds Bank made the transfer to Jackson & Co.’s account before receiving the funds from Citibank: even though Lloyds Bank later recouped them, the funds used to make the payment belonged to Lloyds, and BdS’s funds had to be traced through the clearing system. On that issue, the Court of Appeal also agreed with Millett J. and quoted him (at p. 466):

Unless Lloyds Bank’s correspondent bank in New York was also Citibank, this involves tracing the money [BdS’s funds] through the accounts of Citibank and Lloyd’s Bank’s correspondent bank with the Federal Reserve Bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud.

[83] What distinguishes Agip from Hambrouck is that Lloyds Bank, having assumed the delivery risk, paid with its own money. This broke the link between the funds it paid and the funds it received from Citibank. If passage through the clearing system could on its own eliminate any possibility of identifying the money, tracing at common law would long ago have become totally obsolete and the dictum of the Court of Appeal in Agip that mixing in Jackson & Co.’s account was of no consequence would be of little use. I cannot accept that the result in Hambrouck can be explained by an oversight that occurred because the interruption caused by passage through the clearing system was not argued: P. J. Millett, “Tracing the Proceeds of Fraud” (1991), 107 L.Q. Rev. 71, at p. 74, fn. 7. When, as in Agip, the chain is broken by one of the intervening parties paying from its own funds, identification of the claimant’s funds is no longer possible. However, the clearing system should be a neutral factor: P. Birks, “Overview: Tracing, Claiming and Defences”, in P. Birks, ed., Laundering and Tracing (2003), 289, at pp. 302-5. Indeed, I prefer to assess the traceability of the asset after the clearing process and not see that process as a systematic break in the chain of possession of the funds. Just as the collecting bank receives the funds as the payee’s agent, the clearing system is only a payment process. Paying through the clearing system amounts to no more than channelling the funds.

[84] In Hambrouck, the funds received through the clearing system by Farrow’s Bank, acting as the collecting bank, from the Banque Belge pour l’Étranger had not lost their “identity”. In the same way, the funds in the case at bar have not lost theirs. BNS, acting as the collecting bank, received the funds from RBC through the clearing system and credited them to BMP. The asset traced by RBC is simply its own. It is not the chose in action or the account holders’s personal claim against BNS: R. M. Goode, “The Right to Trace and its Impact in Commercial Transactions — I” (1976), 92 L.Q. Rev. 360, at p. 380. The transactions that followed were all conducted by the recipient and persons related to it who received the money from BMP. Moreover, the fact that some of the accounts had prior balances is not a bar to recovery. Not only were the balances not substantial — only one of the accounts contained over $100 — but the withdrawals by the holders significantly exceeded the balances. It is also worth noting that BNS was both the drawee and the payees’ banker in all the transactions at issue, namely the transfers and payments from BMP’s account and to the related accounts. There was no hiatus like the one in Agip, and the holders of the related accounts were not third parties who had given consideration or changed their positions.

[85] In my view, Taylor, Agip and Hambrouck show that it is possible at common law to trace funds into bank accounts if it is possible to identify the funds. (See also Goode, at pp. 378, 390-91 and 395.) According to Agip and Hambrouck, mixing by the recipient is not a bar to recovery. I do not see those cases as exceptions to a common law rule against tracing in mixed funds. Rather, I accept the view advanced by Lord Millett in Foskett v. McKeown, [2001] 1 A.C. 102 (H.L.), at p. 132, that the rules for tracing money are the same as those for tracing into physical mixtures. This view is also supported by Professor L. D. Smith in his treatise The Law of Tracing, at pp. 74 and 194 ff. For our purposes, there is no need to review all the rules applicable to physical mixtures (Lawrie v. Rathbun (1876), 38 U.C.Q.B. 255; Carter v. Long & Bisby (1896), 1896 CanLII 18 (SCC), 26 S.C.R. 430, at pp. 434-35; J. Ulph, “Retaining Proprietary Rights at Common Law Through Mixtures and Changes”, [2001] L.M.C.L.Q. 449). Suffice it to say that, as between innocent contributors, contributions are followed first to amounts they have withdrawn. In the case at bar, since the withdrawals of all those who received funds far exceeded their contributions, RBC can trace its own contribution to the balances remaining in the accounts.

[86] As Atkin L.J. mentioned in Hambrouck, the question to be asked is whether the money deposited in those accounts was “the product of, or substitute for, the original thing” (p. 335). In the instant case, the identification process is quite simple. I will not go back over the issue of the funds in BMP’s account: there was no relevant movement of funds. Regarding the funds in the related accounts when BNS acted on BMP’s instructions and transferred money to the accounts of 636651 B.C. Ltd., Backman (chequing and savings accounts) and Hashka, the transferred funds were clearly related to the forged cheque BNS had mistakenly credited to BMP’s account. The moneys used for the transfers came from BMP’s account. The link is made with the funds RBC had used to pay the forged cheque.

[87] One issue that was raised is whether certification of the cheques would be a bar to tracing. When a cheque is certified, the certification does not affect the nature of the funds. In discussing the effect of certification in Rattray Publications, at p. 505, Finlayson J.A. stated that certification of a cheque, like acceptance, is irrevocable; see also Centrac Inc. v. Canadian Imperial Bank of Commerce (1994), 1994 CanLII 932 (ON CA), 21 O.R. (3d) 161 (C.A.). As a matter of law, to hold that certification is irrevocable would contribute to the acceptability of certified cheques as substitutes for cash and would also reflect the prevailing perception in the business world that it is irrevocable. However, BNS’s intention in the instant case was not to revoke the certification. In fact, the certified cheques had already been honoured. As Maddaugh and McCamus point out:

The fact that the drawee bank cannot resist payment on a cheque it has certified does not necessarily insulate the payee, however, from a subsequent restitutionary claim by the paying bank. [p. 10-57]

[88] In Rattray Publications, Finlayson J.A. stated that “where a drawee bank honours a cheque notwithstanding a valid countermand and the effect is to satisfy a just debt, the bank may [debit the customer’s account and] successfully defend an action by [the] customer/drawer for reimbursement” (p. 509). Further, where a payment does not satisfy a just debt, the bank “may have an action in restitution against the holder of a certified cheque” (ibid.). Indeed, if a bank has certified a cheque, it cannot deny the authenticity of the drawer’s signature and the sufficiency of the funds. However, certification does not affect the traceability of the underlying funds.

[89] What remains to be discussed is the claim by way of cross‑appeal concerning punitive damages.

4.5 Damages

[90] The Court of Appeal found that BNS had breached the service agreement by reversing the credit in BMP’s account without having been instructed to do so by BMP. However, it also found that BMP had suffered no real injury and accordingly awarded nominal damages of $1. In addition, it ordered BNS to pay BMP the difference of $100 between the bank draft of November 7, 2001, and the certified cheque of November 2, 2001. BNS does not contest this conclusion. BMP seeks an increase in the damages and Hashka, Backman and 636651 B.C. Ltd. seek an order for damages.

[91] In light of my conclusion that BNS could resist BMP’s claim on the basis of the doctrine of mistake of fact, it is my view that no additional damages can be awarded. Since RBC could trace the funds with the assistance of BNS, the same reasoning applies to the restraint of funds and the reversal of credits. Therefore, the claim to have the trial judge’s award restored fails.

[92] BMP also seeks an award of punitive damages. The trial judge rejected this claim, finding that BNS’s conduct did not warrant such an award. In view of my conclusions on BNS’s right, this claim, too, can only fail.

5. Conclusion

[93] Beyond the strangeness of its factual substratum, this case involves an application of the well-established doctrine of mistake of fact to very unusual facts. The business of collecting banks will rarely lend itself to the application of this doctrine because most of the time, the bank will have changed its position, or its customer will have drawn on the credited amount, or the funds will have been mixed in a way that precludes tracing. In this case, however, the application of common law principles leads to a logical conclusion. The Court of Appeal found support for that conclusion in equity and it may be that support can be found there, but the same result can be obtained at common law.

[94] The appeal should be dismissed with costs and the Court of Appeal order affirmed. The cross-appeal should be allowed with costs and the awards of damages in favour of 636651 B.C. Ltd., Hashka and Backman set aside, save for the amount of $13.50 payable to Backman, which BNS does not contest.

Appeal dismissed with costs and cross‑appeal allowed with costs.

Solicitor for the appellant and the respondents on cross-appeal: Paul E. Jaffe, Vancouver.

Solicitors for the respondent/appellant on cross-appeal: Fasken Martineau DuMoulin, Vancouver.