SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: CV-13-10037-00CL
DATE: 20130808

RE: ATLANTIC POTASH CORPORATION, Applicant

AND:

HSBC BANK CANADA, Respondent

BEFORE: MORAWETZ J.

COUNSEL:
A. M. Robinson and N. Chowdhury, for the Applicant
M. Sclisizzi, for the Respondent

HEARD: JULY 25, 2013
ENDORSED: JULY 26, 2013
REASONS: AUGUST 8, 2013

ENDORSEMENT

OVERVIEW

1On July 26, 2013 the Record was endorsed: “Application dismissed with reasons to follow.” These are the reasons.

2This application concerns a lost bank draft. On February 13, 2012, Atlantic Potash Corporation (“Atlantic Potash” or the “Applicant”) purchased a $2 million bank draft (the “Draft”) from HSBC Bank Canada (“HSBC” or the “Respondent”). The Draft was payable to the Minister of Natural Resources, New Brunswick (the “Minister”). The Draft has been lost. There is no indication that the Draft has been destroyed. It has just been lost or misplaced by Mr. Attoe, one of Atlantic Potash’s executives. The Minister has confirmed that the Draft has not been delivered, and if it were to be delivered, it would not be cashed, but in the event it was to be cashed in error, the funds would be returned to HSBC.

3Atlantic Potash requests a declaration that the Draft is void by reason that it has been lost and was not and cannot be delivered to the Minister. It also seeks an order requiring HSBC to return the $2 million held by HSBC.

4Atlantic Potash also requests a declaration that the Draft is not a bill of exchange within the meaning of the Bills of Exchange Act (“BEA”). Alternatively, if it is found that the Draft is a bill of exchange, Atlantic Potash requests an order declaring that an indemnity is not required to be given by Atlantic Potash to HSBC in return for a duplicate bill. In the further alternative, fixing security at $1 pursuant to the provisions of section 155(1) of the BEA.

5Atlantic Potash takes the position that HSBC bears no material risk of liability from cancelling the Draft as the only way the Draft could ever be presented for payment is by way of fraud. If the Draft were to be presented for payment by way of fraud, given all of the legally mandated safeguards in place to protect against fraud, Atlantic Potash submits that HSBC could only approve payment through its own negligence.

6From the standpoint of HSBC, this case is simply about Atlantic Potash wanting HSBC to bear the risk of the Draft. HSBC is prepared to provide a replacement item, but submits it is entitled to an indemnity and security as contemplated by section 155 of the BEA. Further, in the ordinary course, if the Draft is not presented within ten years after it was issued, section 438(1) of the Bank Act obliges HSBC to then remit the funds represented by the Draft to the Bank of Canada. At that point, HSBC is relieved of any obligations under the Draft and the person to who or at whose request the instrument was issued can bring an application to court naming the Bank of Canada, seeking payment of the funds.

7From the standpoint of HSBC, the risks of loss and litigation from a lost draft are real. The issue of negotiation of the Draft is real. In addition to fraud, counsel to HSBC submits that negotiation of the Draft could arise through negligence or mistake. In addition, there is the potential of HSBC being exposed for legal costs. Counsel to HSBC submits that the risks were created by careless loss of the Draft and HSBC should not be made the de facto free insurer for Mr. Attoe’s negligence.

FACTS

8The specific facts relating to the purchase of the Draft by Atlantic Potash and the loss of the Draft by Mr. Attoe are not in dispute.

9Atlantic Potash secured the rights to certain property in New Brunswick containing potash deposits. In return, Atlantic Potash has undertaken with the province certain funding targets. As part of its undertakings, the province required Atlantic Potash to provide security of $2 million to ensure completion of the project. On February 13, 2012, one of Atlantic Potash’s directors, Mr. Attoe, attended at an HSBC branch where Atlantic Potash was a customer to purchase a bank draft in favour of the Minister in the amount of $2 million. HSBC gave Mr. Attoe the Draft, which bore Draft Number 312309. The Draft showed the Minister as payee and it had printed along its bottom the following unique magnetic ink character recognition (MICR) Security Number: 31230910032016930283010.

10Mr. Attoe subsequently misplaced the Draft. The last time he saw it was on February 14, 2012. Upon being unable to find the Draft, Mr. Attoe advised HSBC that it should not pay the Draft.

11The Minister was also advised and confirmed that the Draft had not been delivered and, that if it were to be delivered, the Minister would return it to HSBC. The Minister further confirmed that, if the Draft was somehow cashed in error, the funds would be returned to HSBC.

ISSUE

12At issue in this application is (a) whether the Draft is void and (b) whether Atlantic Potash should be required to give HSBC a secured indemnity for $2 million in order to protect HSBC against any risk of liability arising from HSBC’s cancellation of the Draft. Atlantic Potash submits that the Draft is void and that, in any event, HSBC bears no risk of liability in cancelling the Draft. As such, the funds ought to be immediately returned to Atlantic Potash without an indemnity.

13Atlantic Potash submits that there are two lines of analysis that may apply in this case, both of which should result in the return by HSBC of the $2 million without condition. The two lines of analysis diverge on the issue of whether the Draft is a “bill of exchange” and thereby subject to the provisions of the BEA.

ANALYSIS

14Atlantic Potash devoted a substantial portion of their written argument to the question of whether a banker’s draft is or is not a bill of exchange. Having reached the conclusion that the application fails under both positions put forth by Atlantic Potash, the question of whether the banker’s draft is or is not a bill of exchange does not, in my view, need to be determined or resolved for the purposes of this application.

15If the Draft is not a bill of exchange, the Applicant contends that it is a chose in action governed by the rules of common law and equity. The Applicant contends that title to the $2 million has not passed and cannot pass from Atlantic Potash to the Minister. Further, under the rules of equity while a chose in action was assignable, all prior rights, title and equities of Atlantic Potash’s rights would prevail against a finder/fraudster of the Draft and Atlantic Potash remains the owner of the funds and should be able to recover its funds from HSBC.

16This argument overlooks two points. First, as counsel to HSBC submits, the issue of improper negotiation of the Draft could result, not only as a result of fraud, but also negligence or mistake. As noted by the Supreme Court of Canada in BMP Global v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504 at para 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.

In these circumstances, as counsel to HSBC submits, why should HSBC take any risk of possible loss.

17Second, although the outcome of any factual matrix may result in HSBC’s position prevailing, there is undoubtedly the costs of litigation and a degree of litigation risk. Again, counsel to HSBC raises the legitimate point as to why HSBC should take any risk.

18I accept both of these submissions and reject the position of Atlantic Potash.

19In my view, the transaction as entered into by HSBC should be completely risk free to HSBC. HSBC has received payment from Atlantic Potash. HSBC has issued the Draft. The Draft is an obligation of HSBC. The Draft was lost by a representative of Atlantic Potash. Having concluded the transaction, it is not up to HSBC to factor into the contract any further business risk. Commercial certainty favours HSBC. In my view, the equities do not favour the outcome sought by Atlantic Potash.

20The alternative is that the Draft is a “bill of exchange”. Atlantic Potash argues that, if the bill is a bill of exchange, then:

(a) There has been no delivery within the meaning of the BEA and there is no “holder” or “holder in due course”;

(b) If there is a “holder”, the only possible party who could be a “holder” is Atlantic Potash;

(c) If Atlantic Potash is considered to be the “holder”, it has the option to treat the “bill” as a “note”;

(d) If the bill is treated by Atlantic Potash as a “note”, pursuant to the provisions of section 178 of the BEA, it is “inchoate and incomplete until delivery to the payee”; and

(e) In the further alternative, section 155 of the BEA provides relief to a “holder” when a bill has been lost.

21As to the argument, namely, that the Draft has not been “delivered”, this issue is addressed commencing at paragraph 74 of the respondent’s factum.

74. Atlantic questions whether the Draft can be declared void on the assertion that it has not been “delivered”. It is an interesting academic enquiry, but does not actually resolve the quandary and is inapplicable on the facts. Atlantic purchased the Draft and it was delivered to Atlantic, in the hands of its executive, Attoe. At the moment of delivery from HSBC (being transfer of physical possession from HSBC to Attoe), Attoe as agent for Atlantic, became the holder of the Draft. In fact, it is because Atlantic was the holder that they can avail themselves of the provisions of s. 155 of the BEA, for the relief of granting a duplicate item, is premised on the person who was the holder applying to the drawer.

75. In the ordinary course, a holder of a draft can either make further delivery of the item to the payee (again by physical delivery and transfer of the rights of negotiation), or if the holder so chooses, the holder can return the original of the draft to the drawer for cancellation and re-imbursement of the funds paid to purchase the draft.

76. The BEA does not contemplate or provide for a mechanism to declare the Draft as void, presumably because doing so, absent notice to all potentially affected parties, would interfere with pre-existing rights that unknown holders in due course could have over the “lost Draft”, all without opportunity for distant intermediate parties to assert a position to the contrary. Thus, any declaration made by the court pursuant to its inherent jurisdiction, may be assistive for provision of general notice, but not ultimately determinative of whether parties to the Draft now or in the future have rights that flow from the Draft. Thus, while HSBC is supportive of a declaration that the Draft has been lost, and is likewise supportive of a declaration that if the Draft is found that it must not be negotiated, save and except by delivery to either Atlantic or (if a duplicate item is ordered, to HSBC), HSBC does not support a declaration beyond these confines.

22I accept the submissions of counsel to HSBC on this point. It is, indeed, an interesting academic question. However, commercial certainty is required in this area and the BEA does not provide a mechanism to declare the Draft as void.

23The alternative position that section 155 of the BEA provides relief to a “holder” where a bill has been lost, is, in my view, also of no assistance to the Applicant.

24Section 155(1) and (2) read:

Holder to Have Duplicate of Lost Bill

155(1) Where a bill has been lost before it is overdue, the person who was the holder of it may apply to the drawer to give him another bill of the same tenure, giving security to the drawer, if required, to indemnify him against all persons whatever, in case the bill alleged to have been lost is found again.

Refusal

(2) Where the drawer, on request, refuses to give a duplicate bill, he may be compelled to do so.

25In this case, the risk factors again have to be reviewed. I accept the submissions of counsel to HSBC on this issue. Notwithstanding an element of uncertainty in defining whether a draft is or is not properly characterized as a bill of exchange, drafts are negotiable items, and can be presented through clearings governed by the Canadian Payment Association Rules and Standards, and for most purposes drafts and certified cheques are treated by holders and holders in due course as near cash substitutes. Thus, unlike an ordinary cheque which merely directs one’s banker to remit the face value of the instrument provided that there is adequate credit held to the customer’s account with the financial institution, a bank draft asserts to the holder that the issuing or certifying institution financially backs the instrument. This is important in understanding the risk that a lost draft poses to future potential holders or holders in due course. Those in receipt of a draft, without any necessary contact or investigation of HSBC will recognize the item as being backed by HSBC and may well act in reliance on the apparent strength of HSBC’s financial covenant long before they discovered that the lost Draft has been the subject of this application, or has been voided or replaced.

26It is also noteworthy that, notwithstanding their position that there is no real risk, the record demonstrates that Atlantic Potash was not prepared to provide an indemnity, let alone an indemnity backed by security. By letter dated January 29, 2013, Atlantic Potash’s lawyers advised HSBC’s lawyers as follows:

Our client and Peiwei Ni offered to give HSBC an indemnity. They did so in the belief that the bank had risk management policies and procedures in place that would ensure that a lost bank draft could not be cashed by anyone except the payee. If this is not the case, please advise and our client will then have to consider withdrawing the offer to indemnify.

27In my view, the legal nature of the Draft is such that this entire matter cannot be considered to be risk free to HSBC. To the extent that the court is called upon to consider section 155(1) of the BEA, it is my view that security is required and, further, contrary to the assertion of Atlantic Potash, the security should not be nominal.

28As to what is the appropriate amount of security, it seems to me that the court should not be placed in the position of being the underwriter. The commercial risk can be evaluated by the market. There is some evidence that Atlantic Potash has looked into the possibility of obtaining a bond but it is not clear as to how extensive this inquiry has been. Suffice to say, I have concluded that there is a risk and it is up to the parties to find a market solution.

29The circumstances facing Mr. Attoe and Atlantic Potash are, indeed, unfortunate. However, the risk was created by the actions of Mr. Attoe and the careless loss of the Draft. It is not for HSBC to be made the de facto free insurer for Mr. Attoe’s negligence. In short, this is not a situation where Atlantic Potash can transfer responsibility for its problem to HSBC.

30As noted at paragraph 78 of the respondent’s factum, HSBC remains prepared to issue a duplicate item on provision of a substantive indemnity and security as was proposed by HSBC in January 2013. As further noted by counsel to HSBC, the language of the indemnity can be developed by counsel, or failing that by order of the court.

31In the result, Atlantic Potash’s application is dismissed with costs. If the parties are unable to agree on quantum of costs, brief written submissions, to a maximum of three pages, may be submitted within 30 days.