In a recent Supreme Court of Canada (SCC) decision, the SCC reinforced its position regarding the allocation of liability in cases involving fraudulent cheque schemes.1 In a narrow 5-4 decision, the majority held that liability is to be allocated to the collecting banks depositing cheques, rather than the company failing to detect the fraudulent activity.

The SCC overturned the Ontario Court of Appeal’s ruling that banks should not be liable for converting cheques to non-existing or fictitious payees. The SCC’s stance on the issue has been met with criticism, as many businesses are better positioned to discover the fraud.

It can be argued that the decision presented an opportune time for the SCC to adopt a more objective and predictable approach in cases involving cheque fraud. The policy considerations accompanying the decision may carry negative implications for banking consumers and Canadian commerce generally.


Over the course of nearly four years, a large pharmaceutical company (the Employer), was the victim of a fraudulent cheque scheme implemented by one of its employees (the Fraudster). The scheme involved drafting false cheque requisition forms for business entities with similar or identical names to legitimate customers of the Employer, to whom no debt was owed. The Fraudster registered the business names as sole proprietorships and opened bank accounts at several banks (the Collecting Banks). In total, 63 fraudulent cheques were deposited totaling more than CA$5 million dollars, which was subsequently withdrawn by the Fraudster.

After discovering the fraud in 2006, the Employer filed an action for conversion, a strict liability offence under the Bills of Exchange Act (BEA), against the Collecting Banks. The Employer argued the Collecting Banks were liable for the amount defrauded after transferring funds to an improper recipient without its consent. The Collecting Banks raised the statutory defence provided by section 20(5) of the BEA, arguing the cheques were made payable to either a “non-existing” or “fictitious” entity, and therefore became payable to the bearer.2

The Majority Decision

The majority’s decision centered on the question of which innocent party should bear the loss resulting from the fraud: the Employer or the Collecting Banks?3 The central issue was whether the Collecting Banks could rely on the protection provided by section 20(5) of the BEA.

The majority upheld the existing legal framework and found the payees were not fictitious or non-existing. The SCC found there was a rational basis for concluding that the cheques were made payable to existing clients, given the names of the payee entities were identical or similar to legitimate customers of the Employer.4

The Dissent

The dissenting opinion focused on the particular approach taken by the majority. The strongly-worded dissent emphasized that the subjective analysis adopted by the majority brings uncertainty to Canada’s negotiable instruments and payment system.5

In contrast to that approach, the four dissenting justices proposed a simplified, objective interpretation of section 20(5), in which a payee will be deemed to be “non-existing” where the payee does not, in fact, exist at the time the instrument is drawn.6 A payee will be “fictitious” where there is no real underlying transaction or debt, where the payee is not entitled to the proceeds of the cheques.7


Although the SCC’s decision is consistent with the existing legal framework, the case presented an opportunity to bring predictability to an uncertain area of payments law. It could be argued that the underlying principles and policy considerations of the dissenting opinion better reflect the purpose of the bills of exchange system by supporting negotiability, certainty and finality of payment.8

Given the result of the decision, businesses may be less likely to be diligent in monitoring cheque fraud going forward. It is true that both the Employer and the Collecting Banks were innocent parties to the fraudulent activity. However, it can be argued that greater responsibility and risk of loss should be allocated to the Employer given the circumstances. The fraudulent activity took place over the course of nearly four years, with 63 transactions and more than CA$5 million withdrawn from its accounts. There was ample opportunity for the Employer to detect and prevent the fraud.

The majority decision also limits the circumstances in which collecting banks may rely on the defence provided in section 20(5). Consequently, banks may be more cautious and stringent in negotiating cheques from corporate entities. The implications may lead to increased costs and delays in processing time for banking transactions. The burden could be passed to banking consumers and slow down commerce in Canada.