The Ontario Court of Appeal has released its highly anticipated decision in McDonald v. Toronto-Dominion Bank,[1] a case concerning the Ponzi scheme perpetrated by Robert Stanford. The court noted that the scheme, through which Mr. Stanford and others used Stanford International Bank (“SIB”) to defraud customers of over seven billion dollars, was the second largest Ponzi scheme in history.[2]

This case concerned a lawsuit brought by SIB’s liquidators (the “Joint Liquidators”) against the Toronto Dominion Bank (“TD”),[3] which acted as SIB’s “correspondent bank” from 1991 until SIB’s collapse in 2009.[4] The Joint Liquidators alleged that TD was liable for US $5.5 billion for, among other things, negligent performance of a service.[5] As stated by the trial judge, “[a]t its essence, the Joint Liquidators [sought] to impose a duty of care to protect the bank’s customer from insider abuse.”[6] The trial judge concluded that such a duty did not exist in this case and this finding was upheld by the Court of Appeal.[7]

McDonald is noteworthy for professional services and institutional audiences for two reasons:

  • It confirms that courts will look beyond the “mere identity” of the parties in determining whether a relationship has already been recognized as sufficiently proximate. This is significant because it provides parties greater flexibility in resisting a claim that a duty of care has already been established by case law.
  • The Court of Appeal confirmed that the proposed duty of care in this case fell outside of what TD undertook to provide to SIB. This should cause professional services and institutional entities to carefully evaluate, with legal counsel, the scope of their undertaken services to clients and customers.

The Court of Appeal looked beyond the “mere identity” of the parties in determining whether the relationship had already been recognized as sufficiently proximate.

For one party to be liable to another in negligence, it must owe a “duty of care” to the injured party. Such a duty may be established where the relationship has already been recognized by caselaw as one that is sufficiently close or “proximate” to justify liability.[8] Consequently, the Joint Liquidators argued that TD owed SIB a duty of care because caselaw had previously recognized “proximity between a bank and its customer in respect of the provision of banking services.”[9]

Both the trial judge and the Court of Appeal rejected this argument.[10] The Court of Appeal referred to Supreme Court of Canada caselaw holding that categories of proximate relationships will not always be identified “so generally” and cautioning against “identifying established categories in an overly broad manner […].”[11] Courts are to look beyond “the mere identity of the parties” in determining whether a given relationship has already been established as sufficiently proximate.[12]

Ultimately, the Court of Appeal found that there was no “all-encompassing category of proximity between banks and their customers in relation to ‘banking services’” as this “broad characterization” was at odds with Supreme Court caselaw.[13] This finding may be significant not only for financial institutions, but also for other entities that undertake “an extremely broad range of activities for very different purposes” and do not have “one-size-fits-all” relationships with their customers.[14]

The Court of Appeal confirmed that the proposed duty of care fell outside of what TD undertook to provide to SIB.

Where a relationship has not previously been established by caselaw as sufficiently proximate to give rise to a duty of care, the court will conduct a “full” proximity analysis.[15] The McDonald case involved pure economic loss alleged to have arisen from the provision of a service. Consequently, two factors were determinative in the proximity analysis: TD’s undertaking to SIB, and SIB’s reliance.[16]

The Court of Appeal confirmed that TD’s undertaking was to “act as SIB’s agent for the purposes of transferring funds to and from SIB and its customers,”[17] and that to impose the duty sought by the Joint Liquidators would “expand” TD’s “responsibilities well beyond what it undertook as a correspondent bank.”[18] Significantly, TD had “agreed to provide correspondent banking services,” and not to “assume the role of a regulator, auditor or insurer.”[19]

These comments should prompt professional services and institutional entities to carefully consider, with their legal counsel, the scope of undertaken services to their customers and clients.