Recently, the Supreme Court of Canada affirmed a bank's ability to assist another bank to recover funds acquired by the use of a fraudulent instrument. Although certain provisions of federal legislation govern a bank's rights in connection with particular instruments, these particular rights can only be invoked by the bank itself and not by third parties. Furthermore, a bank does not have an absolute duty to give preference to its client when dealing with a claim for restitution over a fraudulent instrument by not assisting another bank in collecting funds held by its client. In effect, a bank can choose not to invoke of its rights even if doing so would be to its client's detriment.
In B.M.P. Global Distribution Inc. v. The Bank of Nova Scotia, B.M.P. Global Distribution Inc. (BMP) reached an oral agreement with a distributor to sell its products in the United States. This agreement was made without negotiation, review of sales forecasts, or other financial due diligence. In fact, the amount sought by BMP and accepted by the distributor was "pulled out of the air" at $1.2 million.
In connection with the distribution agreement, BMP received an unendorsed cheque for $904,563, drawn on an account at Royal Bank of Canada (RBC). An individual from BMP deposited the cheque at a branch of the Bank of Nova Scotia (BNS) where BMP held an account with a balance of $59. Due to the odd circumstances, BNS did not provide BMP with immediate access to the funds. However, BNS eventually received the funds from RBC and released them to BMP.
Later, RBC notified BNS that the cheque contained a forged signature. Unfortunately, BMP had already made numerous transfers through its BNS account. RBC sought assistance from BNS to recover the remaining traceable proceeds of the cheque. RBC and BNS entered into an agreement, whereby BNS agreed, at RBC’s request, to restrain and subsequently transfer back to RBC the funds traced to the fraudulent instrument. To that end, BNS transferred $777,336 to RBC. As a result of this transfer, BMP sued BNS for damages equivalent to the transferred funds.
In its decision, the Supreme Court of Canada (SCC) overruled a lower court decision and held, among other things, that where a bank pays money to another under a mistake of fact (in this instance, the authenticity of a signature), the bank is entitled to recovery provided certain circumstances are met, all of which circumstances were met in this case.
Section 128(a) of the Bills of Exchange Act (BEA) states that by accepting a bill, a person is precluded from denying a holder in due course the existence of the genuineness of the signature on the bill. A holder in due course is an individual who has taken the bill in good faith and for value without notice that the bill has been previously dishonoured. Section 165(3) of the BEA states that where a cheque is delivered to a bank for deposit to the credit of a person, and the bank credits the person with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque. The SCC determined that BMP could not rely on either section of the BEA. The SCC reasoned that because BMP did not take the instrument for value, it was not a holder in due course, and as such could not rely on section 128(a) of the BEA. In addition, although section 165(3) of the BEA deems the collecting bank (i.e. BNS) to be in the same position as a person who has taken the bill free from any defect of title, the bank is not obligated to rely on the benefit of section 165(3) when restitution is claimed, and a third party cannot obligate a bank to assert the bank's benefit under this section.
Finally, the SCC also determined that there was nothing in the service agreement between BMP and BNS that precluded BNS from returning the funds to RBC. In fact, the standard form service agreement between a bank and its client gives a bank the explicit right to charge back amounts credited to its customer’s account if an instrument is not settled.