Court File and Parties

Court File No.: CV-17-572189 Date: 2018-12-27 Superior Court of Justice - Ontario

Re: Foodinvest Limited, Plaintiff – AND – The Royal Bank of Canada, Defendant

Before: E.M. Morgan J.

Counsel: Gerald Matlofsky, for the Plaintiff Catherine Francis, for the Defendant

Heard: November 16, 2018

Reasons for Judgment

[1] The Defendant moves for summary judgment under Rule 20.01(3) of the Rules of Civil Procedure. It submits that its relationship with the Plaintiff is governed by a contract that exempts the Defendant from liability for the services it provides unless it is negligent, and the Plaintiff has produced no evidence of negligence.

[2] The Plaintiff, a client of the Defendant’s, has brought a claim seeking recovery of wire payments made by it to the Poland-based agents for producers of meat products located in Brazil and Chile. The Plaintiff, acting through its principal, Svetlana Zolotova, was in the business of arranging for the export of the meat to customers in Russia. The agents and recipient of the funds were two companies whose bank accounts were located in Poland: Pierogarnia SC K Kadysz J Fidler (“Pierogarnia”) and Faenadora Lo Miranda Limitada (“Faenadora”). The wire payments to the Polish banks were made by the Plaintiff using the RBC Express self-serve service.

[3] It turned out that the accounts in Polish banks under the names Pierogarnia and Faenadora were fraudulent accounts. The invoices from these two sales agents were passed on to and paid by the Plaintiff’s customers in Russia. The Russian customer’s funds were, in turn, wired by the Plaintiff to the agents’ accounts in Polish banks, but were diverted to beneficiaries of those accounts in South America. As a consequence, the Brazilian and Chilean suppliers were never paid and the meat was never delivered to Russia. The Russian customers sued the Plaintiff in Russia and on June 22, 2016 were awarded a judgment by a Moscow court in the amount of $179,071.94 (US).

[4] The Plaintiff alleges that the Defendant was negligent in not warning of the fraud by the Polish sales agents and not investigating the Polish bank accounts to which the Plaintiff wired the funds for the transactions. The Defendant seeks to dismiss the entire action. It contends that the responsibility the Plaintiff would place on the Defendant to root out the fraud in the Polish bank is beyond the Defendant’s duties at law.

[5] The Defendant’s position is that it performed its due diligence with respect to the transactions in issue in accordance with its contract with the Plaintiff. It contends that anything more was beyond its legal obligation and beyond the reasonable expectations of a customer using the RBC Express service. Counsel for the Defendant submits that the Defendant is under no duty to investigate a potential fraud in another bank, and that its only duty is to ensure that its own customer’s account (i.e. the Plaintiff’s account) was not misused and that the Plaintiff intended to send money to the party to which it was sent.

[6] In a series of SWIFT messages in April-May 2015, Pekao Bank in Poland advised the Defendant that it suspected fraud in relation to wire transfers to the Pierogarnia and Faenadora accounts. The Defendant’s National Fraud Detection Group (“NFDG”) officer looked into the matter and came to understand that the money transfers from the Plaintiff to the Pierogarnia and Faenadora accounts were authorized by the Plaintiff and were done in the ordinary course of its business. He therefore concluded that whatever had triggered the Polish bank’s suspicions may be a matter for the police or financial regulators, but did not involve a misuse or a hijacking of the Plaintiff’s account and so was not the Defendant’s responsibility.

[7] The NFDG officer outlined this conclusion in emails sent to an account manager managing the Plaintiff’s account. The NFDG email dated April 24, 2015 summarizes the Defendant’s information as follows:

Considering that the client’s account activity seems to fit their normal pattern, NFDG does not suspect RBC Express fraud or Email Compromise Fraud. However, as per the above confirmation from the Polish bank which is saying the beneficiary account is used for criminal activity, we are putting in a UTR (Unusual Transaction Report) as this activity does not fit the scope of NFDG to investigate.

[8] In other words, the Defendant’s NFDG officer investigated the Polish bank’s allegations, and determined that if a fraud or other illegality had taken place it was external to the Defendant rather than internal to the Defendant. The Plaintiff’s funds were sent by RBC Express to the account for which they were intended, and there was nothing out of the ordinary about the transaction from the point of view of the Plaintiff’s account. In that circumstance, where a foreign financial institution had advised that it was suspicious about its own customer and not about the Defendant’s customer, the Defendant concluded that its investigation was at an end.

[9] The Plaintiff sent a total of 13 transfers to the Pierogarnia and Faenadora accounts using RBC Express. Upon inquiry by the Defendant, the Plaintiff confirmed that it had a business relationship with those two companies and that it had intended for its wire transfers to go to them. The Plaintiff expressed no concern that the ultimate beneficiaries of those Polish accounts appeared to be located in South America.

[10] The RBC Express service used by the Plaintiff is governed by a number of documents, all of which were signed by Ms. Zolotova, the principal of the Plaintiff. Ms. Zolotova at first ran her meat export business as a sole proprietorship, and subsequently incorporated the Plaintiff, in September 2013 to carry on the existing business. Ms. Zolotova is the sole employee and signing officer of the Plaintiff.

[11] Ms. Zolotova signed some of the RBC Express documentation prior to the incorporation and some of the documentation subsequent to the incorporation. The Master Client Agreement was signed by Ms. Zolotova in January 2012 (i.e. prior to the incorporation) while the documents appointing her as Service Administrator for the Foodinvest account, including the Master Client Agreement Authorization form, were signed by Ms. Zolotova in November 2013 (i.e. subsequent to the incorporation). Also in November 2013, Ms. Zolotova, on behalf of the Plaintiff, re-enrolled in RBC Express.

[12] The Master Client Agreement which governs all RBC Express accounts contains a number of terms and conditions that limit the Defendant’s liability. These include the following:

1.3 Authorized Persons Only. The Customer represents, warrants, covenants, and agrees that each of the Services and Security Devices will only be used by Persons properly authorized on its behalf for such purpose… The Customer is responsible, and will indemnify and hold harmless Royal Bank and its Representatives, for all Losses arising out of, or incidental to, the use, including any unauthorized use, of the Services or Service Materials by each such Person, including all actions or missions of the Person…

6.5 Customer’s Responsibility: Internal Procedures re Instruments and Accounts. The Customer will at all times have in place commercially reasonable procedures designed to prevent and detect losses due to forged or unauthorized signatures, fraud or theft in relation to Accounts, Services, Instruments or other Documents…

7.1 Ongoing Representations, etc. Each time a Service is used, the Customer implicitly represents, warrants, covenants and agrees that: (i) this Agreement is and remains in full force and effect and is a binding and enforceable agreement between Royal Bank and the Customer; (ii) the Customer, each of its Documents and each use of the Services complies with this Agreement, Applicable Laws, its constating documents, and any by-laws, resolutions, or other applicable obligations…

7.2 No Representations, Warranties, or Conditions by Royal Bank. Except as expressly provided in this Agreement, Royal Bank disclaims all representations, warranties, and conditions of any kind, including any oral, implied, statutory, or other representations, warranties and conditions…

13. Liability and Disputes

13.1 Disclaimer of Lability. Royal Bank is not responsible for any Losses, except to the extent caused directly by Royal Bank’s negligence or willful misconduct and subject together limitations under this Agreement.

132. Additional Limitations. Even where Royal Bank is negligent, and regardless of the cause of action, Royal Bank is not responsible for any Losses that are indirect, consequential, special, aggravated, punitive, or exemplary damages, including lost profits. Even where Royal Bank is negligent, and regardless of the cause of action, Royal Bank is also not responsible for any Losses resulting from any of the following:

(i) the actions of, or failure to act by, any other Person except for Royal Bank’s Representatives who are acting in accordance with Royal Bank’s specific instructions;…

(iii) the Customer, including any of its Representatives: (A) failing to comply with this Agreement or any other Document applicable to the Services; (B) engaging, either alone or with others, in any fraudulent, unlawful, dishonest, or other improper acts or omissions; (C) carrying out a transaction, including if the transaction is the result of any mistake or errors in, omissions from, inaccuracy, or other inadequacy of, or delays with any Document provided to Royal Bank or its Representatives; (E) making, consenting, authorizing, or contributing to, or otherwise being responsible for, or benefiting from a transaction; (F) failing to take measures to protect against and prevent the Losses, including by using an Electronic Channel that it knows or reasonably ought to know contains software that has the ability to reveal to an unauthorized Person, or to otherwise compromise, any Security Device…

13.4 Third Party Disputes. Except as otherwise provided in this Agreement, Royal Bank is not responsible for any Dispute the Customer may have with any other Person, including its clients, payees, or creditors or any Beneficiary, as a result of this Agreement or any Service. The Customer assumes full responsibility for resolving any such Dispute directly with the Person in a manner that does not adversely affect Royal Bank. Royal Bank is not responsible if the Person: (i) does not credit the Customer for an instrument for whatever reason; (ii) charges the Customer fees or penalties related to an Instrument; or (iii) does not supply the goods or services purchased or if the goods or services supplied are not suitable.

16.8 No Agency, Trust, or Partnership. This Agreement does not create any agency, trust, joint venture, or partnership relationship between the parties or between Royal Bank and any other Person, including any Beneficiary. Nothing in this Agreement will confer on the Customer or any Person the authority to act for, bind, create, or assume any obligation or responsibly, or make any representation, on behalf of Royal Bank.

16.9 No Fiduciary Relationship. This Agreement does not create any fiduciary obligations or relationship between the parties. The Customer understands and acknowledges the merit and risk associated with this Agreement and each Service, and acknowledges it has sufficient knowledge and experience to evaluate and assume such merit and risk. The Customer will not construe any information provided by Royal Bank as legal, tax, investment, financial or business advice or counsel. The Customer is relying on the advice of its own advisors and counsel, which are unaffiliated with Royal Bank, for purposes of entering this Agreement and using any Service.

[13] It is the Defendant’s position that it has no legal responsibility to the Plaintiff for any losses suffered by the Plaintiff as a consequence of the non-delivery of meat to Russian clients by Pierogarnia and Faenadora or their respective principals. Counsel for the Defendant submits that the Defendant breached no legal duty to the Plaintiff, was not negligent in respect of the Plaintiff’s RBC Express transfers or otherwise, and, in any case, is immune from liability to the Plaintiff by the terms of the Master Client Agreement above.

[14] It is the Plaintiff’s position that it is not bound by the terms the Master Client Agreement because Ms. Zolotova is Russian-speaking an did not understand what she was signing. The Plaintiff also takes the position that the Master Client Agreement does not apply to it because Ms. Zolotova signed the Agreement prior to incorporating the Plaintiff. Neither of these arguments is supported by the evidence.

[15] In the first place, Ms. Zolotova is a resident of Canada, the Plaintiff is an Ontario corporation, and both she and it carry on their business in English. Ms. Zolotova deals with Canadian financial institutions, including but not limited to the Defendant, in English. She has opened accounts and signed numerous banking documents other than the Master Client Agreement, all of which are in English. Ms. Zolotova has been engaged in international businesses for the past 20 years, conducting transactions in English without any apparent trouble. She used the RBC Express self-serve system on her own, without the help of a translator. She is herself a trained bank employee who passed a 6-month bank training program in the United States, in English.

[16] Tellingly, Ms. Zolotova has dealt with this litigation in English. She has sworn no less than 7 supporting affidavits in English without an interpreter. As counsel for the Defendant points out, if I believed she could not read and communicate in English I would have to disregard all of her affidavit evidence, leaving me nothing to rely on in assessing the Plaintiff’s arguments. However, I do not believe this to be the case. Ms. Zolotova’s counsel in this proceeding speaks no Russian. She has instructed him in English. There is simply no credibility to her assertion that she did not understand English well enough to read the Master Client Agreement.

[17] Moreover, as a person experienced in international business transactions, Ms. Zolotova is well versed with banking documents and their contents. There is no indication in the record that the Master Client Agreement or other banking documents signed by Ms. Zolotova on the Plaintiff’s behalf took her by surprise. There is equally no evidence that the Defendant ever suggested that it would assume responsibility for transactions that the Plaintiff carried out entirely on its own using RBC Express. The Agreement was entered into voluntarily and with full understanding by the Plaintiff of what it was and the reason for signing it. There is neither an allegation nor any evidence of a misrepresentation or otherwise misleading statement or conduct on the Defendant’s part.

[18] In addition to all of that, the terms of a financial services agreement are generally binding whether or not the customer has read the agreement: Rehman International v Royal Bank of Canada, 2013 ONSC 4591, at para 2. The Defendant presented the documents to Ms. Zolotova, hid nothing from her, and gave her every opportunity to read them and ask any questions. Ms. Zolotova conceded in cross-examination that she signed them of her own free will. In this strictly commercial transaction between a bank and an experienced businessperson, there are no grounds on which to find that the Master Client Agreement, and all of the other agreements that the Plaintiff entered into with the Defendant, are unenforceable. They are all valid and enforceable in accordance with their terms: Bank of Montreal v Witkin, [2005] OJ No 3321, at paras 54-55 (SCJ).

[19] The Master Client Agreement provides that the Defendant is not liable for any loss to the Plaintiff through use of the RBC Express system unless it can be shown that the Defendant was negligent in the performance of its duties. Under the circumstances, the Plaintiff cannot demonstrate negligence by the Defendant. There was no duty of care breached by the Defendant. Moreover, the Plaintiff has put forward no evidence demonstrating the applicable standard of care of a financial institution in the position that the Defendant found itself in, let alone evidence that the Defendant breached that standard of care.

[20] The duty of care on the Defendant is defined by the contract between it and the Plaintiff. It is certainly the case that the Defendant does not take on any duties which it has specifically contracted out of with the Plaintiff or which are directly contrary to the terms of the binding contract between them. The Supreme Court of Canada has indicated that for claims based on negligent misrepresentation or negligence in the performance of a service, it is the contractual relationship that defines the scope of the duty and so “foreseeability…is constrained by the purpose of the undertaking”: Deloitte & Touche v Livent Inc., 2017 SCC 63, [2017] 2 SCR 855, at para 44.

[21] The Plaintiff contends that the Defendant owed Ms. Zolotova and it a duty to alert them to the messages it received from Bank Pekao in April 2015 advising the Defendant of its suspicions regarding the receiving accounts. Defendant’s counsel states in response that this would be a novel duty for which there is no authority. Counsel goes on to submit that defining the Defendant’s duty in this way would effectively make the Defendant liable for losses incurred on a transaction by its customer that were not caused by any banking error. The Defendant’s position is that not only does a bank have no such responsibility, it has no right or interest in making inquiries of its customer about the customer’s business relationship with the counterparty to a transaction.

[22] The transactions which can give rise to a duty of care by a bank to its customer are varied. The British Columbia Court of Appeal emphasized this point in Groves-Raffin Construction Ltd. v Canadian Imperial Bank of Commerce (1976), 64 DLR (3d) 78, at para. 112, where it observed that the entire context of the transaction must be taken into account:

Whether or not it has been attained in any particular case has to be decided in light of all the relevant facts, which can vary almost infinitely. The relevant considerations include the prima facie assumption that men are honest, the practice of bankers, the very limited time in which banks have to decide what course to take with regard to a cheque presented for payment without risking liability for delay, and the extent to which an operation is unusual or out of the ordinary course of business.

[23] The B.C. court went on to state that the extent of a bank’s obligation to use reasonable care and skill necessarily grows out of ordinary banking practices. Thus, for example, where it is ordinary practice for a bank to place a ‘hold’ on cheques before clearing them when deposited by a customer, but for inexplicable reasons it fails to do so and the cheque turns out to be fraudulent, a breach of the duty to use reasonable care can be gleaned from the deviation from standard practice: Oak Incentives Group Inc. v The Toronto Dominion Bank, 2011 ONSC 3245, at para 80. On the other hand, where the customer uses a self-serve product that in the ordinary course engages no extra scrutiny by the bank, the bank’s lack of duty of care can be gleaned from the ordinary hands-off practice.

[24] The Defendant points out that not only did the Polish bank advise it of suspicions regarding the Pierogarnia and Faenadora accounts, but the Defendant was in the dark and reasonably suspicious about the Plaintiff’s own business. The Plaintiff carried on its affairs in a way that raised at least a suggestion that Ms. Zolotova was aware of, and perhaps a part of, the unusual business arrangements which the Polish bank had observed with respect to their own customers. After looking into the Plaintiff’s transactions, the NFDG reported:

There are no deposits (either by atm or ptb), no Moneris credits, no bill payments or point of sale transactions. Further, the client’s address is a residential address which matches her personal profile. Considering the line of business, that is irregular. There does not appear to be any actual business activity except these incoming and outgoing wires. It might be an attempt to get around Russian sanctions as all funds are coming from Russia, then going back to various countries.

[25] Counsel for the Defendant submits that financial institutions in Canada have an ongoing obligation to report suspicious transactions such as these to the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”). The mandate of that regulatory body is to detect and deter money laundering and other internationally illegal financial activities. Under the FINTRAC rules, it is impermissible for a bank to ‘tip off’ a customer who is suspected of such activity; any report of allegedly illegal activity is to be kept confidential by the financial institution, “whether or not a criminal investigation has begun: Proceeds of Crime (Money Laundering) and Terrorist Financing Act, 2000, c. 17, s. 8”. Indeed, a ‘tip’ to a suspect may lead to a fine imposed on the informant: FINTRAC Rules, Guideline 2: Suspicious Transactions, June 2017, art. 5.3.

[26] Accordingly, the Defendant’s duty was limited to satisfying itself that the Plaintiff had in fact carried out the wire transfers. Far from having a further duty to advise the Plaintiff of the Polish bank’s suspicions about illegality being carried on by the counterparties, the Defendant was under a duty NOT to alert the Plaintiff as to the suspicions about its involvement in illegality. Given the absence of any duty to inform the Plaintiff about the messages it received from Bank Pekao, the Plaintiff has no cause of action arising from the failure to convey to it this information.

[27] Separately, and even if the Defendant were under a duty of care in respect of the information it received from Bank Pekao, the Plaintiff has provided no evidence that the Defendant fell below the standard of care required of it. The Supreme Court of Canada has held that it is necessary to bring expert evidence to the court to demonstrate reasonable and expected banking standards, unless the banking practices in question are “matters falling within the ordinary common senses of juries [which] can be judged to be negligent”: Neuzen v Korn, [1995] 3 SCR 674, at para. 57. Where the matters are of a technical or professional nature, “[n]o jury is capable of deciding on its own what understanding of recent developments the Defendant should bring to his practice”: Neuzen, citing B.C. Court of Appeal (1993), 16 CCLT (2d) 65, 72.

[28] The courts have demonstrated the need for expert evidence in determining professional standards in the specific context of banking practices and the detection of fraud and adherence to FINTRAC rules. Strathy J. (as he then was) observed in Dupont Heating & Air Conditioning v Bank of Montreal, at para 44: “Expert evidence may be required concerning the extent to which [the bank] has complied not only with the anti-money-laundering legislation, but also with sound modern banking practice.”

[29] In a summary judgment motion, parties must put their “best foot forward”: Combined Air Mechanical Services Inc. v Flesch, 2011 ONCA 764, at para 15. As was said in Pizza Pizza Ltd. v Gillespie (1990), 75 OR (2d) 225, 238 (Gen Div), “It is not sufficient for the responding party to say that more and better evidence will (or may) be available at trial. The occasion is now.”

[30] Having found that there is no duty of care on the Defendant, it is not necessary to come to a definitive determination of whether a reasonable standard of care was breached. Here, it is not possible to do so in the absence of any expert evidence put forward by either side. In the absence of evidence on which I can rely in determining whether the Defendant fell below the standard of care, I am compelled to conclude that such evidence does not exist.

[31] As a consequence of this lack of evidence, I am equally compelled to conclude that the Plaintiff will not be able to prove its case. The claim requires that the Plaintiff prove negligence; if it cannot do so the Defendant does not have to prove its lack. There is therefore no genuine issue requiring a trial. Summary judgment as sought by the Defendant provides a “fair and just adjudication” and determination of this action: Hryniak v Mauldin, 2014 SCC 7, [2014] 1 SCR 87, at para 4.

[32] The Defendant’s motion for summary judgment is granted. The action is dismissed.

[33] As the successful party, the Defendant deserves its costs. Its counsel has submitted a Costs Outline seeking a total of $50,067.89 on a partial indemnity basis. Plaintiff’s counsel has also submitted a Costs outline in which he would request partial indemnity costs in the total amount of $87,433.58. Given that the Defendant’s costs are a fraction of the Plaintiff’s costs, the Defendant’s request cannot be one which would surprise the Plaintiff or that is beyond what the Plaintiff would reasonably expect to pay in a motion like this: Rule 5.01(1)(0.b) of the Rules of Civil Procedure.

[34] The Plaintiff shall pay the Defendant costs in the amount of $50,067.89, inclusive of all fees, disbursements, and HST.

Date: December 27, 2018 Morgan J.