TABLE OF CONTENTS1.0 INTRODUCTION................................................................................................................................3

1.1.1 When is payment made?......................................................................................................................................3

2.0 PAYMENT BY INSTRUMENT.......................................................................................................42.1 History and types of payment instruments............................................................................................................42.2 Collection of instruments.........................................................................................................................................4

2.2.1 Collection through a clearing & settlement system: cheques..............................................................................42.2.1.1 The Barclays Bank v. Bank of England (1984, arbitration, UK).................................................................5

2.2.2 Credit & debit cards.............................................................................................................................................6

3.0 REGULATION OF PAYMENT INSTRUMENTS.........................................................................63.1 Systemic Risk: the Payment Clearing and Settlement Act...................................................................................6

3.1.1 The effect of insolvency of the banks..................................................................................................................73.1.1.1 Collings v. City of Calgary (1917, S.C.C. from Alta)..................................................................................73.1.1.2 Barclays Bank of Canada v. Price Waterhouse (liquid. Of CCB) (1999, C.A. Alta.)..................................7

3.2 Settlement Risk: the Canadian Payments Act.......................................................................................................83.3 CPA Rule A1: instruments acceptable for clearing in ACSS...............................................................................8

3.3.1 Instruments admitted into ACSS.........................................................................................................................83.3.2 Instruments not admitted into ACSS...................................................................................................................9

3.4 CPA Rule A4: the Right to return instruments through clearing.......................................................................93.4.1 Return of instruments outside of time limitation...............................................................................................10

3.4.1.1 National Slag v. CIBC (1985, C.A. Ontario).............................................................................................103.4.1.2 Stanley Works v. National Bank of Canada and RBC (1981, C.A. Québec).............................................103.4.1.3 National Bank of Greece v. Bank of Montreal (2001, C.A. Ontario)........................................................11

4.0 BANK ACCOUNTS & BANKER-CUSTOMER K......................................................................124.1 Legal nature of bank deposits...............................................................................................................................12

4.1.1.1 In re Hil-A-Don: Bank of Montreal v. Kwiat (1975, C.A. Québec)...........................................................124.2 Obligations in banker-customer contract............................................................................................................13

4.2.1 Express obligations: standard-form K’s............................................................................................................134.2.1.1 The standard Canadian provisions.............................................................................................................134.2.1.2 The UCC provisions..................................................................................................................................14

4.2.2 Implicit obligations............................................................................................................................................164.2.2.1 Bank of Montréal v. A.G. of Québec (1975, C.A. Québec)........................................................................16

4.2.3 The BEA provisions..........................................................................................................................................174.2.4 The Bank Act provisions...................................................................................................................................174.2.5 Proceeds of Crime (Money Laundering) & Terrorist Financing Act................................................................19

4.2.5.1 Tayeb v. HSBC Bank (2004, UK finst commercial court).........................................................................194.3 Paying instruments drawn on customer’s account.............................................................................................21

4.3.1 The requirement of authority.............................................................................................................................214.3.2 Exculpatory clauses in std-form K’s: “verification agreement”........................................................................21

4.3.2.1 Arrow Transfer Co. v. Royal Bank of Canada, BMO (1972, S.C.C. from BC).........................................214.3.3 The duty to set up “internal controls”................................................................................................................22

4.3.3.1 Canadian Pacific Hotels v. BMO (1987, S.C.C. from Ontario)................................................................224.4 Collection of instruments deposited into customer’s account............................................................................23

4.4.1.1 BMP Global v. Bank of Nova Scotia (2007, BC C.A.)...............................................................................23

5.0 NEGOTIABLE INSTRUMENTS...................................................................................................255.1 The Concept of Negotiability.................................................................................................................................25

5.1.1.1 Assignment of claim without notice to account debtor.............................................................................255.1.1.2 Assignment of more R’s than those held by assignor................................................................................25

5.1.2 Bills of exchange in the world of business........................................................................................................25

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5.2 Formal requirements for bills, cheques or notes.................................................................................................265.2.1.1 “Unconditional” order................................................................................................................................265.2.1.2 Order “addressed by one person to another”.............................................................................................275.2.1.3 Signature....................................................................................................................................................275.2.1.4 Payment “on demand or at a fixed or determinate time”...........................................................................275.2.1.5 A “sum certain in money”..........................................................................................................................275.2.1.6 Macleod Savings & Credit Union v. Perett (1980, S.C.C. from Alta).......................................................275.2.1.7 Payable to a “specified person” or “bearer”..............................................................................................29

5.2.2 The BEA provisions..........................................................................................................................................295.3 The Requirement of Delivery................................................................................................................................31

5.3.1.1 National Bank of Canada v. Tardivel Associates (1994, Ontario C.A.)....................................................315.4 The liability of parties to holders..........................................................................................................................32

5.4.1 Holder: section 2 BEA.......................................................................................................................................325.4.2 Holder for value.................................................................................................................................................335.4.3 Holder in due course..........................................................................................................................................33

5.4.3.1 Williams and Glyn’s Bank v. Belkin Packaging (1982, S.C.C. from BC)..................................................345.4.4 Real (“Absolute”) Defences to Holders in Due Course....................................................................................35

5.4.4.1 9138-7746 Québec v. Société Financière Wells Fargo (2007, Cour du Québec).....................................365.5 Certified Cheques...................................................................................................................................................36

5.5.1 Certification and the C.c.Q................................................................................................................................365.5.2 Certification and the BEA.................................................................................................................................37

5.5.2.1 Bank of Nova Scotia v. Canada Trust (1998 Ontario finst).......................................................................385.5.2.2 A.E. LePage Investments v. Rattray Publications (1994, Ontario C.A.)...................................................38

5.5.3 Effect on the underlying obligation...................................................................................................................395.5.3.1 Bank of Montréal v. Legault (2003, Québec C.A.)....................................................................................39

5.6 Fraudulent Instruments.........................................................................................................................................405.6.1 Forged drawer’s signature.................................................................................................................................41

5.6.1.1 Drawer against the drawee bank & the bank’s defences...........................................................................415.6.1.2 Drawer against the collecting bank............................................................................................................42

5.6.2 Fraudulent endorsement & 20(5) BEA..............................................................................................................425.6.2.1 Drawer against the collecting bank............................................................................................................435.6.2.2 BOMA Manufacturing v. CIBC (1996, S.C.C. from BC)...........................................................................435.6.2.3 Drawer against the drawee bank................................................................................................................445.6.2.4 Bank of Montréal v. A.G. of Québec (1975, C.A. Québec) -- repeat.........................................................445.6.2.5 Canadian National Bank v. Gingras (1976, S.C.C. from Qué).................................................................45

5.6.3 Material alterations – not covered.....................................................................................................................45

6.0 LETTERS OF CREDIT...................................................................................................................466.1.1 Definition...........................................................................................................................................................46

6.2 The principle of autonomy & exception of fraud................................................................................................466.2.1.1 Bank of Nova Scotia v. Angelica Whitewear (1987, S.C.C. from Québec)................................................46

6.2.2 The law on letters of credit – no official codified rules.....................................................................................486.3 Effect on underlying obligation.............................................................................................................................48

6.3.1.1 Barclays Bank of Canada v. Price Waterhouse (liquid. Of CCB) (1999, C.A. Alta.)................................48

7.0 WIRE TRANSFERS AND DEBIT CARDS...................................................................................497.1 Point of sale.............................................................................................................................................................497.2 LVTS.......................................................................................................................................................................49

8.0 Index...................................................................................................................................................51

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1.0 INTRODUCTION Marc Lemieux’s coordinates: Tel: 514. 598. 3664. Email: marc.lemieux@gazmetro.com Books held for us on reserve: 2002 ed. Bradley Crawford, “Payment, clearing & Settlement in Canada,” 2007

ed.; Professor M.H. Ogilvy, “Bank and Customer Law in Canada.” Useful books : Bradley Crawford, “Payment, Clearing and Settlement in Canada” (2002); Professor L’Heureux, “Droit Bancaire.” Me: both are in our library, and Crawford 2002 ed. is not on reserve.

Banks are among the most regulated businesses in the developed countries. Typically, the government allows the market to determine which businesses survive, and which don’t. Not so with banks – without government intervention, the economy would come into disrepute.

The banking system of the U.S.A., Canada and continental Europe are very different. In the U.S.A., banks can offer insurance – this not allowed in Canada.

We’ll focus on cheques – a form of negotiable paper. We’ll also look at letters of credit. Letters of credit are fundamental to international businesses. That’s what international companies and countries use to pay each other.

The second part of the course is on electronic instruments. Debit, credit cards, wire transfers. For very large sums, the Canadian system forces business parties to use wire transfers (cf. cheques).

1.1.1 When is payment made? The types of payment mechanisms we’ll study: cheques, letters of credit, electronic transfers. Big questions: when is payment made – i.e. when is the obligation is discharged? Does the mere giving of the cheque

release you from the obligation to pay the rent, for example? How does the instrument achieve payment? The case of Collings v. City of Calgary: the Δ had a debt, repayable with the condition that the Δ’s cheque be certified by

a bank. The Δ drew an instrument on Dominion Trust Co., which was not a bank but a trust company. He had the cheque certified by the Dominion Trust, and gave the cheque to the creditor (City of Calgary). By the time Calgary received the physical cheque, the Dominion Trust Co. was bankrupt. Calgary sued the Δ.. Jgmt: the obligation is not discharged by the mere handing of a cheque, since Dominion is not a bank.

How would this be decided in Québec? 1564 C.c.Q. : Where the debt consists of a sum of money, the debtor is released by paying the nominal amount due in money which is legal tender at the time of payment. (2) He is also released by remitting the amount due by money order, by cheque made to the order of the Cr and certified by a financial institution carrying on business in Québec, or by any other instrument of payment offering the same guarantees to the Cr, or, if the creditor is in a position to accept it, by means of a credit card or a transfer of funds to an account of the creditor in a financial institution.”

o 1994 modernization of the C.c.Q.: 1564 C.c.Q. is weird in some respects: e.g. a cheque certified by a financial institution in Québec (why not in other provinces?)

There is no equivalent of 1564 C.c.Q. in CmL. Two rules: an obligation to pay money is satisfied at the delivery of legal tender. Although there is no written statute, it’s also the rule in Canadian CmL. The effect is the same as delivering money. CLARIFY THIS.

CRAWFORD (1243): when it is the drawer (debtor) who requests his cheque to be certified (and not the Cr who asks for certification), the drawer is not discharged from his debt (129 BEA). “The ordinary rule is that, prima facie, the delivery of a negotiable instrument as payment suspends the debt conditionally only, and the liability of the drawer revives if the instrument is not honoured upon due presentment (Holden Financial Corp. v. 411545 Ontario Ltd) It would be extraordinary if the drawer could obtain a discharge simply by procuring certification before delivering the cheque to the creditor. There is nothing to prevent the parties bargaining for the release of the drawer upon delivery of a certified cheque, however…”

3-310 UCC (text 1-145): the effect of delivering a certified cheque or bank draft is equal to delivering currency: it extinguishes the debt. Unless there is an agreement otherwise btw Cr & D. If a non-certified cheque is presented, the obligation is “suspended” – during this time, you cannot be sued. If everything goes well, the cheque will go through, the money paid, and the obligation extinguished. If the cheque is not paid (bankruptcy, insufficient funds, etc..), the obligation will not be extinguished.

Terminology note: legal tender = money.

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2.0 PAYMENT BY INSTRUMENT2.1 H ISTORY AND TYPES OF PAYMENT INSTRUMENTS Law governing negotiable instruments did not arise by itself. It arose out of customs – the commercial practices that were

done for years. E.g. one area of commercial practice is called “financial derivatives.” There is one transaction called “swap” – it started

with a single occurrence in 1980’s, and became a multi-trillion tool used by lots of people. It arose out of custom. Every member in the derivatives market abides by the customary rules of the Derivative Association (not legislation).

Clearing rules also arose out of custom.. Note that the clearing and settlement practice described in Barclays pertains to 19th C, and the statute codifying this (UK Bills of Exchange Act 1882) also became outdated. The physical presentment is no longer applicable – electronic images are used. In Barclays the arbitrator concludes the necessity of physical presentment – modification of legislation ensues.

2.2 COLLECTION OF INSTRUMENTS

2.2.1 Collection through a clearing & settlement system: cheques Cheques are used for convenience. They have been around since the early 19th C. Since then, a number of other

mechanisms have come up – debit card, credit card, wire transfers (very prevalent in corporate deals) There are 2 banks involved: the paying (drawee) bank and the collecting (presenting) bank (who has the creditor as its

customer) Canadian banks receive thousands of cheques every day, drawn on various other Canadian banks. In each bank, once

received by the bank teller or the ATM machine, these cheques are transferred to a place called “data center.” This is a centralized department that every bank has. Its function is to collect money. Remember that each cheque must be presented to the correct branch of the paying bank.

For customers who are currently owing to the bank and can’t be trusted (Lemieux: e.g. students), the cheque may be put on hold/freeze, and the account balance will not immediately reflect the deposit. For others, the account balance goes up immediately, reflecting the “provisional credit.” This is a temporary credit, subject to “shit happening” (quoting Lemieux).

o Student: can data centers be a private company? Lemieux: yes, this type of department can be outsourced. At the data center, cheques are sorted out according to the bank on which they are drawn at the end of every banking day.

Sidenote: if the cheque is drawn on the same bank, the procedure is very simple – all that is necessary is verifying the accuracy and validity of the cheque.

o Last year in Canada there were approx. 10,000,000,000 transactions for a value of $10 trillion for bank-to-bank cheque exchanges.

The sorted cheques are put into containers, labelled with the name of the drawee bank.. These containers are sent to a central point, the clearing house (“chambre de compensation”), where the employees of each bank meet. Lemieux imagines this as a nice common room area with leather chairs, whisky and fireplace… okay then. The containers are exchanged.

The total amounts in the containers are tabulated. The net differences between the amounts owed by exchanging banks are settled via the Central Bank. Each bank has an account at the Central Bank of Canada, the “clearing accounts” – those accounts are adjusted each day at the clearing house. “Clearing” means presenting the instrument in the clearing house + tabulating the indebtedness of each bank. “Settlement” is the payment of that indebtedness. If some cheques are not to be paid by the paying bank, that portion of settlement is unwound later on. There is a time limit for this.

Once the cheque gets to the appropriate branch of the paying bank, the paying bank makes its decision: to pay or not to pay. What are its considerations?

o (1) The debtor customer may have insufficient money in his account (unless there is overdraft protection). The unpaid cheque is then remitted to the presenting bank.

o (2) There may be a countermand order: the client revokes the order to pay the cheque.o (3) There may be a question is of technical accuracy: is the cheque a forgery, is it signed, etc.

If the decision is made to pay the cheque, the paying bank debits its customer’s account. There is “high probability” that the cheque has been honoured after 2 business days: but the process takes a different amount of time depending on who the payment parties are. If the branches of the presenting & paying bank are close by, the clearing cycle will take 1 business

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day. If the branches are remote, the process will take longer – 1 to 3 days. Especially if the bank is in another country, it can take a week.

Barclays is a “friendly arbitration.” Strangely, the case did not arise out of a dispute, but out of a wish of the participants of the UK Clearing House in 1984 to clarify a point of law. By this time, computers acquired imagining capability (storing pictures), which allowed banks to send the cheques by computers – computerizing the whole clearing process. This electronic process would be much cheaper for the banks. The bankers wanted to know whether this practice was consistent with the legislation of UK at that time (same legislation in Canada). “Express or implied waiver” was the only exception to the rule of presentment. Don’t worry about this narrow issue – the important part is the clearing process.

Since last year in Canada, cheques are no longer physically transferred to the Clearing House (after years of petitioning). It’s all done electronically (at the central computer in Toronto which computes all the totals and settlement amounts). The government modified the legislation to accommodate for the change. This saves a lot of money and time.

o In UK this change came 10 years earlier. Large value cheques go through their own procedure.

So, the sum-up of the process: payee bank receives cheques from its tellers & ATM cheques go to the data center cheques go to clearing house where settlement occurs cheques go to paying bank where the pay/not pay decision is taken.

1.1.1.1 The Barclays Bank v. Bank of England (1984, arbitration, UK)Facts The two banks (one, “presenting” bank of the payee, another “paying” bank of the payer) argue who has

responsibility to give funds to the payee. Specifically, the question is when the presenting bank’s responsibility is discharged.

Holding Presenting bank’s responsibility is discharged when the cheque is presented to the branch of the paying bank (cf. clearing house)

Reasons Clearing house is where banks exchange cheques: the presenting banks give the cheques submitted by their customers (creditors) to the banks on which these cheques are drawn.

The procedure for cheques is this: (i) customer brings cheque to his bank (presenting bank), and credit is conditionally added to the customer’s account, (ii) the cheque is stamped with magnetisible ink, which can be read by a computer, and the bank sorts all of its cheques received during the day into bundles for each drawee bank (iii) the bundles are transferred to the clearing dept. of the presenting bank where they are organized and physically arranged into closed boxes, (iv) the closed boxes are taken to the clearing house where employees of various paying banks pick them up (without inspection), (v) the boxes are brought to the clearing dept. of the paying bank, where they are fed through reader-sorter machines, and totals owing are checked over, and customers’ account balances are projected (not actually debited), (vi) the sorted cheques are delivered to the branches of the paying bank on which they were drawn, where they are inspected for accuracy (e.g. for presence of signature) and validity (e.g. sufficient funds, absence of injunction), and where the customer-debtor’s account is debited (unless cheque is dishonoured/invalid), (vii) banks pay each other net balances from the exchanged cheques, adjusting for dishonoured/invalid cheques later.

The Bills of Exchange Act 1882 states that the presenting bank discharges its responsibility by presenting the cheque to the paying bank within reasonable time, unless there is express or implied waiver by the paying bank and the debtor customer.

Case at bar: presenting bank argues that presentation happens at the clearing house, cf. when the cheques are delivered to the paying bank’s appropriate branch – that’s when the presenting bank’s duty is discharged. The presenting bank argues that it’s an old usage created by the bankers (for their convenience)

No such waiver here! The customers are not told about this. The decision to honour the cheque happens at the branch. The customer-debtor’s account will not be debited until the branch authorizes the cheque.

The paying bank, from the moment of delivery of the cheques to the clearing house, is a mere agent of the presenting bank. If the cheque gets lost en route btw clearing house and the paying bank’s branch, it is debited to the presenting bank (a rule agreed by the banks)

Banks always stress that until the cheque is fully cleared by the paying branch, the amount cannot be treated as real credit by the creditor-customer.

Statutory rule: a drawer of a cheque (debtor) is discharged from the obligation to pay unless the cheque is presented to him or his bank branch. If this can be overcome by an old usage between banks, the customer-

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debtor must necessarily be aware of this and agree to this, and the proof of the knowledge & assent must be very strong..

Obiter Interesting piece of history: clearing houses were established when the use of cheques became too heavy to allow sending individual clerks to collect cash from the drawee banks.

2.2.2 Credit & debit cards The same parties participate, so the same terms.

3.0 REGULATION OF PAYMENT INSTRUMENTS Every government in every country is anxious to ensure that the banks do not become insolvent, and their payment

mechanisms are orderly. “Systemic risk” occurs when one of the participants becomes insolvent, and this insolvency is transmitted like a disease to

other participants, undermining the whole system. “Settlement/operational risk” involves problems of settlement. In Canada, there are about 5 major banks, about 60 other banks doing the business of banking in Canada, and some credit

unions. In total, there are about 100 participants in the clearing system. What if one of the participants becomes insolvent and unable to pay its obligations to the other members?

There is a risk of “contamination”: if one member owes to another and is unable to pay, there is a risk that the other member will be unable to pay to the next one, etc. One insolvency can snowball. It’s called the systemic risk.

In Canada, the systemic risk is controlled through the Payment Clearing and Settlement Act (“PCS Act”). The preamble outlines the policy reasons for controlling banks (“Whereas Parliament recognizes that the stability of the financial system in Canada and the maintenance of efficient financial markets are important to the health and strength of the national economy”)

There are three mechanisms for clearing:o ACSS (automated clearing and settlement system)o LVTS (large value transfer system)o Interac system – the debit card transaction clearings (“point of sale transaction,” i.e. payment at the store with

the card)

3.1 SYSTEMIC R ISK: THE PAYMENT CLEARING AND SETTLEMENT ACT The Payment Clearing and Settlement Act deals with the systemic risk.

2 PCS Act (definitions): “clearing and settlement system” means a system or arrangement for the clearing or settlement of payment obligations or payment messages in which:

o (a) there are at least 3 participants, at least one of which is a bank,o (b) clearing or settlement is all or partly in Canadian dollars, ando (c) the payment obligations that arise from clearing within the system or arrangement are ultimately settled

through adjustments to the account or accounts of one or more of the participants at the Bank and, for greater certainty, includes a system or arrangement for the clearing or settlement of securities transactions, foreign

exchange transactions or other transactions where the system or arrangement also clears or settles payment obligations arising from those transactions;

3 PCS Act (definitions) “systemic risk” means the risk that the inability of a participant to meet its obligations in a clearing and settlement system as they become due or a disruption to a clearing and settlement system could, through the transmittal of financial problems through the system, cause

o (a) other participants in the clearing & settlement system to be unable to meet their obligations as they become due,

o (b) financial institutions in other parts of the Canadian financial system to be unable to meet their obligations as they become due, or

o (c) the clearing and settlement system’s clearing house or the clearing house of another clearing and settlement system within the Canadian financial system to be unable to meet its obligations as they become due.

4 PCS : a system can be designated by the Governor of the Bank of Canada (the Canadian government)

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5 PCS: bank may enter into agreement with a clearing house or a participant with respect to (a) netting arrangements; (b) risk-sharing and risk-control mechanisms; (c) certainty of settlement and finality of payment; (d) the nature of financial arrangements among participants; (e) the operational systems and financial soundness of the clearing house; and (f) such other matters pertaining to systemic risk as may be agreed on by the parties to the agreement.

6 PCS: the Bank of Canada may give orders to the clearing house to adopt certain practices, or cease others.

3.1.1 The effect of insolvency of the banks Insolvency, as we discussed, disturbs the functioning of the clearing section. 13 PCS Act: notwithstanding insolvency, the

netting agreement btw banks remains. It shields the normal process from individual insolvencies. CRAWFORD (174) The claims of members of the clearing system against each other with respect to their obligations

upon settlement vouchers and instruments rank as ordinary claims in the winding-up or insolvency of any liable member.

1.1.1.2 Collings v. City of Calgary (1917, S.C.C. from Alta)Facts Δ tried to pay taxes with an instrument that was not even a cheque (drawn on Dominion Trust Co., which was

statutorily forbidden from doing business of banking).Reasons The instrument was not a cheque, so taxes were not paid. The instrument was not accepted by a bank, so it’s not

a cheque that can be validly used for payment of taxes.

This is an early 20th C case, remember. A tax clerk issued a notice to the Δ – that the cheque must be payable to the city, and must be certified. Collings went to his trust co., the Dominion Trust (which was not a bank), to get it certified. By the time the cheque is received, Dominion Trust Co. went bankrupt.

The city of Calgary argued that it was not paid the taxes, and sued Collings. Collings resisted the action – why? When a bank certifies your cheque, it becomes responsible for payment instead of you. Before certifying a cheque, a bank will debit the client’s account and hold on to the money. What must have happened in Collings, is this: the Dominion Trust must have grabbed Collings’ money before going bankrupt, and Collings must have been called upon to pay twice.

1.1.1.3 Barclays Bank of Canada v. Price Waterhouse (liquid. Of CCB) (1999, C.A. Alta.)Facts Barclays (Cr) loaned a sum of $450K to a company called Pacific. Pacific moved its banking to the Canadian

Commercial Bank (“CCB”), and transferred its Barclays loan to CCB in the following way: CCB took security in Pacific’s collateral, and issued an irrevocable letter of credit to Barclays. CCB then became insolvent, and Barclays claims priority for repayment of its letter of credit by CCB.

Holding The letter of credit has priority – ref. Canadian Payment Associations Act (“CPAA”)Reasons The Canadian Payments Association Act provides a definition of the “priority payment instruments” and also an

exception to priority where an instrument is meant to serve as payment between two banks (two members of the CPA)

“the object of the priority provisions of the Act is to confer, in the interest of commercial activity, a special status upon money orders, bank drafts and similar instruments not enjoyed by mere general or trade debts. The common feature of priority payment instruments is the assurance of payment so long as the issuing bank has funds.”

The commercial purpose of the instrument in question (which is targeted by the CPAA) is to offer assurance of payment to the payee by reliance on the creditworthiness of the issuing bank. The risk of non-payment is shifted from the original D to the issuing bank. The issuing bank then takes security in the D’s collateral.

Here, the letter was to provide security for Barclays’ loan. This was not issued from one bank to another for effecting payment between them. The purpose of the

legislation is to ensure trustworthiness of banks in the eyes of customers (“the policy of promoting, here and abroad, the commercial reliance upon the credits of Canadian banks suggests that a domestic or foreign beneficiary be protected). The clearing transactions between the members are excluded.

The claims of members of the clearing system against each other, in other words, rank as ordinary claims.

Letter of credit is a like certified cheque. It’s as if CCB gave a cheque to the Barclays Bank. Priority payment instruments provide a middle layer btw SCr and UCr. After SCr’s are paid, and before the UCr’s are paid, the debtor must pay to the priority payment instrument holder.

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In most circumstances, certified cheques are equivalent to cash. We have an interest in promoting confidence in the ability of banks to honour its instruments.

This is the second most recent failed bank in Canada. There were 3 cases in total: CCB, Northland and another one. The most recent example of a bank that was wound-up is BCCI, which had branches across the world. This was a “powder bank” – a drug-money bank which held laundered money. It had a branch in Canada, and at one point became the subject of investigation in certain countries. Its assets were eventually seized, and it went insolvent.

Another example is in our casebook (a newspaper clipping) – the “Northern Rock” bank in UK. This was the “ABCP crisis” – asset-backed commercial paper crisis. It hit the market last August. This is a recent “boutique” bank, in that it funded its capitals by ABCP’s (rather than by the clients’ deposits). When the ABCP market collapsed, the bank went down. There is much insecurity among Northern Rock’s customers and their frantic withdrawal of savings from the Northern Rock. The Bank of England gave assurances to the clients that it would guarantee their credit, but this has not calmed the clients down.

o When there are many withdrawals, the bank is unable to grant loans to anyone, which creates further problems.o The way most banks work (but not Northern Rock) is that they build their capital on client’s deposits, grant loans

from that capital to other clients and collect interest from those loans. If there is much withdrawal, the bank’s operation is undermined.

The CIBC announced last month that it was “writing down” $2 billion of their assets. It has recently thrown out some of its administration which “wrote down” $10 billion, some of which was backed by an insolvent entity.

Ask: how does the inter-bank ability to honour certified cheques or letters of credit relate to PCS Act? Is the section 2 definition of clearing & settlement relevant?

3.2 SETTLEMENT R ISK: THE CANADIAN PAYMENTS ACT The other risk, the “settlement” or “operational” risk is governed by the Canadian Payments Act. E.g. all the

cheques must have the same physical dimensions to be properly processed, or the times of processing must be specific. The Payments Act deals with these issues.

One can’t stress enough the importance of an efficient national clearing system. Every day, thousands of cheques are processed.

Payments Act establishes the Canadian Payments Association (“CPA”). Now, this association existed before the legislation, but it was private, even secretive. It was a “boys’ club.” It decided who could be a member. The Payments Act gave it an official statutory status. Today, insurance companies, investment funds, trust companies want to participate in the system – and the legislation provides rules for admission.

o Sidenote: the securities are cleared much like the negotiable instruments. Shares are settled just like cheques. Debit cards did not exist in the 1980’s. There sprang up a private club called “Interac” which conducted research into the

possibility of cards with magnetic strips. Today, the $1.50 charge is often applied to withdrawals – the money goes to the original Interac club (for having invested in the research).

Other members wanted in, and were not let in. Litigation ensued, where Interac was accused of anti-competitive practices. This ended up with an agreement, which solidified into official guidelines for admission into the Interac Club.

RULES of the Canadian Payments Association, ensuring efficiency of the clearing process (the power to create rules on clearing & settlement is granted in 19 Canadian Payments Act). The rules existing in the then-private CPA club were adopted. The rules we’ll be looking at are: A1, A3 and A4.

Pre-authorized payments are another type of clearing that are dealt with by the Payments Act.

3.3 CPA RULE A1: INSTRUMENTS ACCEPTABLE FOR CLEARING IN ACSS3.3.1 Instruments admitted into ACSS The mandate of the CPA is twofold (sec. 5 Canadian Payments Act):

o (i) Establish clearing systems, i.e. ACSS (automated clearing and settlement system: includes cheques, POS or point of sale debit cards, and PAD or pre-authorized debits, an arrangement used to make regular payments, e.g. for a car lease, insurance, mortgage) and LVTS (large value transfer system) clearings. LVTS is also known as wire transfers (EFT, electronic funds transfer). In Canada, you cannot make a cheque for more than $25m, so you are forced to make a wire transfer, and

o (ii) Facilitate the interaction of its system with other systems of clearing and settlement. An example of other clearing & settlement system is Interac (a private club). Lemieux: in the near future, our cards will have chips, rather than magnetic strips.

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How Interac works: imagine going to The Bay to buy a pair of mittens. To pay for them, you use your debit card. The sales clerk enters the details of transaction into a system – the system of Interac. The names of the customer and his bank appear. Imagine that you are with the Bank of Nova Scotia, and The Bay is with RBC. You confirm the amount on the keypad and slide the card – this sliding of the card is your authorization to have your account debited. The magnetic strip contains your personal ID number, and it works just like signing of the cheque. A message is sent to your bank through the private system of Interac (immediately). The bank is immediately asked to confirm or to dishonour the transaction. The bank gives an immediate answer through the computer. Within the Interac system, the Bank of Nova Scotia debits your account and transfers the amount to RBC.

There are thousands of other customers with accounts in the Bank of Nova Scotia and other banks who are using their debit cards at the same time. At the end of each day, all of the transactions between each pair of banks and tabulated in terms of net. This occurs every 24 hours. The participants in the Interac system then use the ACSS to settle the Interac debts.

The only difference with the cheque systems is the returning of dishonoured cheques. In Barclays v. Bank of England note the para. which talks about the 4 contracts involved in the payment of cheques. There are 4 parties: payer, payee, presenting bank, paying bank. So the first K is btw the payer and payee, whatever its object is, which calls for the payment of money. The second K is btw the payee and the presenting bank, which is a bank-customer K. Third, the payer has a K with his bank, the paying bank. Fourth, there is a K btw the two banks, which is really the clearing rules. The rules look like law, but they are not.

When the dishonoured instruments are returned, the settlement has to be adjusted. In Interac, the authorization of debit is immediate, whereas with cheques, the credit to the payee is provisional, subject to approval which takes a few days. In Canada, the customer is never actually informed whether the credit is final, but the rule of thumb is 2 business days, after which you can be reasonably sure that the payment cheque has been honoured (this is the time it takes for the cheque to travel to the appropriate branch of the paying bank, and for the decision to be made there).

3.3.2 Instruments not admitted into ACSS Foreign instruments: the rules for clearing and settlement that we discussed apply only to Canadian banks (members of

the CPA). One caveat: Canadian system accepts cheques drawn on the U.S.A. banks: these cheques are bundled up and sent to the U.S.A. clearing system.

As technology advances and new instruments appear, the system may or may not accommodate them. One example is “telecheques.” There is a reference to telecheques in the rules of the CPA (page 200, V-1). Telecheques are transactions through the phone: the customer is asked for authorization to make a payment by a bank representative, and the agreed amount is debited to the customer’s account (for payment of a credit card issued by the same bank, for example). It’s a practice adopted by some banks to ensure regular payment of credit cards. This practice resulted in many complaints: the customers argued that they had not really authorized such transactions. The complaints got to the CPA.

The CPA adopted a temporary measure (the concern was fraud), and ultimately, telecheques were excluded from the list of admissible items in the ACSS. This practice, in CPA’s opinion, was too susceptible to fraud.

“Electronic wallet” with a chip (cf. magnetic strip) – when banks become more serious about using it, they will design a mechanism to match safety and efficiency of the ACSS process. The main advantage of chips is security. The magnetic strip can be copied (beware of the ATM’s that don’t have bank logos on them!)

Another thing Europe has (and we just started using it) is cordless debit card swiping machines. Letters of credit do NOT go through the clearing system. They are privately collected. Same with foreign cheques. That

is, the cheque will be physically sent to, say, Finland, to whatever clearing system they have in Finland.

3.4 CPA RULE A4: THE R IGHT TO RETURN INSTRUMENTS THROUGH CLEARING Return and redirection of funds. Fundamental element is in section 4. If, for any reason, the payment is refused, then the

paying bank has the R to return the instrument through clearing. This is the basic rule. Rule A4 section 1(b): nothing prevents the parties from enforcing their rights outside of the CPA Rules. Rule A4 section 4 : Subject to the following exceptions, an item may be returned by the drawee pursuant to this Rule if, for

any reason payment is refused or cannot be obtained: (a) no item shall be returned for the reason that the “words and figures differ” where the difference is twenty dollars ($20) or less; and (b) a drawee may not return an item that it certified before the item was exchanged for the purpose of clearing and settlement, unless the item is returned for the reason “forged endorsement,” or for the reason that the Item has been materially altered subsequent to certification.

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As the instrument is returned, the effect is immediate and opposite - the payee’s account is debited, and the paying bank’s account is credited.

In Rule A4, there is a time limit for the exercise of the R to return a dishonoured cheque (Rule A4 section 5). For all regular items, the return must be made no later than 1 business day after the receipt of the cheque at the location where the paying bank can make the decision to pay/not pay. Exception: for cheques that are fraudulently endorsed the return has no time limit, while for cheques that were materially altered, it’s 90 days whether the alteration is apparent or not.

Rule A4, section 3(b) excludes the POS and PAD transactions (“the procedures, timeframes and responsibilities do not apply…”)

Sec. 24 Bills of Exchange Act (“BEA”) : the bank is not personally liable for a cheque unless it personally endorsed it. This is because through a cheque you give your bank an order to pay from your account – the paying bank does not give any personal undertakings to pay that money. 310 UCC: the effect of delivering a certified cheque extinguishes the debtor’s obligation. Delivery of uncertified cheque only suspends it subject to successful clearing.

Reasons for which a paying bank may refuse to pay: a cheque is forged, insufficient funds (apparently, in Canada it’s a criminal offence to issue a cheque drawn on your insufficient funds, if it’s done knowingly!), there is a countermanding order, the account is closed, the account is seized, the account is held by a bankrupt, the holder of the account has died.

o E.g. Cinéarts: screws up its shareholders and runs. The bank account was seized.o If you make a large purchase, no one will accept a personal cheque (cf. bank-endorsed one, a “certified cheque”)

3.4.1 Return of instruments outside of time limitation CPA rules give banks 1 day to return the bad cheque from the place where the paying bank can make the decision to pay

or not to pay. So if a branch of a bank is remote, the totally delay is obviously greater. There is no “time-limit police” monitoring the return of the cheques by banks. And no one but the presenting bank knows

when the time limit starts to run. So what happens when the return of the cheques is late, i.e. returned outside of the prescribed time period? All the CPA does is provide the time limit, but says nothing on the sanctions.

The two following cases reach opposite result. The controversy is still raging.

1.1.1.4 National Slag v. CIBC (1985, C.A. Ontario)Facts Π, National Slag, presented a cheque to its bank CIBC, drawn on BMO. The BMO dishonoured the cheque and

returned it to CIBC one day too late. The CIBC took back the credit initially given to the Slag’s account. Slag appeals.

Holding No K-ual breach or negligence by CIBCReasons First, BMO cannot be sued because, even though it contravened the clearing rules, it owes no duty of care to π

CIBC has a clear K-ual agreement with its customers, including π, which states that if the cheque is dishonoured, CIBC reserves the R to debit back the amount of the cheque originally credited to the customer.

There is no negligence by the CIBC, nor is there any loss sustained by the π Slag as a result of 1-day delay.Obiter “If the law drives us to what one might conclude is an absurd result, we must accept that.”

National Slag was decided after Stanley Works, but it does not cite it – on purpose. BMO takes its sweet time returning the cheque. National Slag is pissed off. National Slag takes the position that the CPA

rules are meant to benefit 3rd parties, that is customers, and that therefore BMO owes a duty of care to it. How can National Slag sue BMO, when it is the paying debtor had insufficient funds? The C.A. says there can not be any

loss. The cheque was worthless from the beginning. We’ll talk about the CIBC-π action later.

1.1.1.5 Stanley Works v. National Bank of Canada and RBC (1981, C.A. Québec)Facts Π received post-dated cheques from its debtor, drawn on National Bank of Canada (NBC). It deposited one cheque

in July into his bank, RBC, which was delivered to NBC. The NBC harboured doubts about the debtor’s solvency, but still debited his account. The π then deposited another cheque in August, which was duly delivered to NBC. This time NBC decided that the debtor had insufficient funds and returned both cheques with “insufficient funds” note. The RBC promptly took back the credit from the π’s account.

Holding NBC not liable to π (no juridical link), but RBC did not sufficiently protect the interest of its client (π), so it’s liable for the amount of the cheque ($44K)

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Reasons NBC breached the clearing rules (it had to return the dishonoured cheque within 48hrs). But the clearing rules govern transactions strictly btw banks, and have nothing to do with customers. There are no stipulations in these rules for the benefit of customers. NBC is off the hook.

RBC, however, could enforce its R’s (to which it’s entitled in virtue of clearing rules) against NBC. The RBC’s courtesy to NBC at the expense of its very own customer is plainly negligent. Any document purporting to limit this liability must be interpreted in favour of the client.

A corporate customer of a bank is often both a creditor of a bank (it deposits funds there), and a debtor of a bank (banks usually extend credit to the customer). The loan may be used to pay the creditors of the corporation.

Here, the NBC bank had concerns about the creditworthiness of its customer in its borrowing capacity. That is, can the credit be extended to it to pay the cheque? After about 11 days, the bank finally concludes that its customer is insolvent and returns the cheque.

The outcome of Slag differs in the matter of customer/presenting bank. Lemieux went to the court records and took a look at the bank agreement btw Stanley Works and RBC. It was the same agreement as the one btw National Slag & CIBC!

There is a basic misconception in this case, however, and it’s the π’s lawyer’s fault. The C.A. decided that there is a duty on the part of RBC to its customer to help it, as much as it can, by enforcing its R’s against the NBC. The lawyers for the NBC acknowledged the CPA rules. These rules were kept in secret at the time, and were not available to the court. The π’s lawyer pled that the CPA rules were the following: if the cheque is not returned within 48hrs, the paying bank is deemed to have accepted it. But there is no such sanction actually stated in the CPA rules. The C.A. accepted this interpretation of the rules at face value, and understood the Δ’s acknowledgment of the existence of the rules as acceptance of the π’s interpretation.

Furthermore: the return of the cheques is done electronically. Rule A1: items in dispute are not admitted into the clearing system: i.e. RBC would not be allowed to return the returned cheque. So all that RBC was allowed to do was (i) what it actually did, i.e. debit its customer, or (ii) take proceedings under CPA against RBC. So RBC left Stanley Woks to sue on its own.

Lemieux: so the C.A. agrees that RBC could have refused the cheque. But Lemieux: as we have seen, returning of the cheque is not possible.

Another thing: the debtor in this case become insolvent. Why should the π get a full amount whereas other Cr’s get only a portion?

The controversy in approaches taken by Ontario & Québec continues today.

1.1.1.6 National Bank of Greece v. Bank of Montreal (2001, C.A. Ontario)Facts National Bank of Greece (NBG) returned a dishonoured cheque to the presenting bank, BMO, one day too late. A

special panel comprised of 3 CPA members adjudicated on the issue (Rule A4) and ordered NBG to pay the amount of the cheque to the BMO. NBG argues that BMO suffered no loss because it could take back the credit awarded to its customer, and that the panel’s decision was unreasonable.

Holding Applicable std of review of the panel’s decisions is low; decision was NOT unreasonableReasons The panel’s decision should be reviewed with minimal intervention by higher courts. The panel is composed of

CPA members’ employees, who know the rules by virtue of their work in the financial institutions. The CPA rules are not general law, and do not draw on general legal concepts. The decisions have no impact

“on either the private law rights and duties of banks, their customers, and the payers and payees of cheques, or the remedies available to enforce them”

Instead, the CPA panel provide expeditious rulings, which affect only the banks and other (voluntarily joined) financial institutions. Its only goal is to regulate the inter-bank national clearing and settlement system.

In this case, the panel decided that BMO’s ability to take back credit from its customer is irrelevant. What’s relevant is the accounts as between BMO and NBG: the NBG gained credit, and BMO suffered a loss.

Sidenote from the news: merging of banks, insurers, trust companies, and another type financial of institutions (“four pillars”) was not allowed (to prevent monopoly). But in the 1980’s the government realized that the four pillars could do business together better, and so they were allowed to merge.

Issue subsisting today: merging of banks. The banking community in the 19th C was very different. A lot of banks were weeded out, and so today we have about 6 major banks. They compete with all the world banks which come to do

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business in Canada or to finance Canadian clients. In fact, Canadian banks are very, very small compared to the global banks. Merging is crucial for the banks.

o Consider Bombardier, a huge Québec company. It started as a small skidoo-manufacturing company, with its own little financer. Today its financer is not a Canadian bank. It does business with large, universal banks.

Since 1990, there has been talk of allowing the banks to merge. Banks compete with each other just like any other business – for clients and profits. One way to achieve glory is through the size of capital. Amalgamation is resisted by the government, though, because of consumer concerns. The issue has subsisted for more than 20 years. Today in the news: Bank of Nova Scotia is pushing for the change… this is 20-year-old news!

4.0 BANK ACCOUNTS & BANKER-CUSTOMER K4.1 LEGAL NATURE OF BANK DEPOSITS Strangely enough, the nature of bank deposits has been a controversial issue for many years. In certain situations, the characterisation of deposits matters. One such situation is in Hil-A-Don. As we know, once you become bankrupt, you cease to be able to manage or dispose of your own property. A trustee steps

in: he is vested with the power to manage property for the benefit of the creditors. Typically, the debt is greater than the value of assets. The trustee wants to use as many assets as possible – which is what happened in Hil-A-Don, where the trustee requested the $11K in the bank account of the bankrupt.

1.1.1.7 In re Hil-A-Don: Bank of Montreal v. Kwiat (1975, C.A. Québec)Facts The Δ company goes bankrupt. It has 2 accounts at π bank: one, a loan from the bank for $35,000, and another, a

debit account of $11,000. The trustee in bankruptcy requests the $11K, bank teller transfers the amount to him without thinking – the π bank now asks that money back, arguing that its debt is extinguished by the Δ’s debt (set-off). Issue: does the money belong to Δ (and therefore trustee), or is it separate from co.’s patrimony?

Holding Bank account in this case is a form of debt, not property of the Δ co.Reasons The money in a bank account is not a “regular deposit” in the sense that a bank is a mere bailor who must return

an identical thing. Rather, the bank is entitled to use the money and remit an equal amount of money. The debit account is a liquid debt owing to the customer. The other account, the bank loan, is a reciprocal debt

owing to the bank. Thus, when the two debts coexisted, the accounts merely reflected the accounting details, rather than Δ’s credit against the bank. So the $11K was never part of Δ’s patrimony.

Even if the debit account was a loan with a term, the co. lost the benefit of the term on its own loan when it went insolvent (or, in the alternative, when it became bankrupt)

The trustee has two arguments: (i) the K between Hil-A-Don and the bank was a K of deposit (rather than a K of loan to the bank). The C.c.Q. describes K’s of deposit differently than loans. An item that is deposited cannot be used by the bailor. It’s like leaving your coat in a restaurant: the title to the coat definitely does not pass to the restaurant owners. Even if you don’t pay for your meal, the restaurant has no right to sell your coat to offset its loss. That’s what the trustee asserted: the bankrupt’s money deposited into his account still belongs to the bankrupt.

But the controversy ended with this case. The deposit is a loan to the bank. The court decided this by looking at the parties’ expectations: if you leave some money at the bank, you don’t expect to get the same bills afterward. In fact, the bank actively uses the money that the customers deposit. That’s how they function: they give you a little interest on your deposit, and loan your money to someone else at a much higher interest. So a deposit account is definitely not a “safety box.”

The other argument of the trustee is (ii) all the other creditors of Hil-A-Don will receive a fraction of the amount they are owed, whereas the bank will be paid the entire $11K, so it’s not fair. The bank will be better off than the rest of the creditors. The court responds to this argument with the rules on bankruptcy (the set-off occurs prior to bankruptcy, which is allowed), but we are not concerned with bankruptcy in this course.

So, the bank sets off the $35K owed to it with the $11K, and is left with the sum of $24K, which it will claim in the bankruptcy proceedings.

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4.2 OBLIGATIONS IN BANKER-CUSTOMER CONTRACT

4.2.1 Express obligations: standard-form K’s4.2.1.1 The standard Canadian provisions Volume II, 416, 417: check out a std agreement between customer & bank. Recall that in National Slag and Stanley Works, the bank-customer agreement was at issue. The language in both cases is

almost identical, and is often referred to as “the right of chargeback.” Page 417, provision entitled “Debiting your account” (section 8(ii)). The CIBC can debit your account after crediting, if

the instrument in question was returned to CIBC for any reason, whether in compliance with CPA rules or not (!) The R of chargeback is a pure K-ual provision btw the bank & the customer. In the U.S.A., it’s codified in the UCC

provisions. Hence, different approaches. In Canada, the market established the rules and the std form agreements. The government authorities have not interfered. In the U.S.A., for other reasons, codification of the rules was chosen.

o Again, the issue we are looking at is: when can a bank debit an account for a settlement which has not been paid (i.e. subtracting the provisional credit), or the settlement unwound after the instrument is dishonoured.

The CIBC agreement provides that the debiting can occur whether or not the instrument is returned in compliance with CPA rules or not. One wonders if that came after Stanley Works. That jgmt basically imposes the duty on the bank to enforce their CPA rules for the benefit of the client. Lemieux (scornfully): as if that changes anything! The decision in Stanley Works would not have been different if those words were in the agreement.

What are the big-ticket items in a std bank-customer agreement? There are several categories: (i) collection of instruments (customer deposits), (ii) payment of instrument (customer gives his cheque to someone or makes a payment by other means).

The first thing that strikes Lemieux about a bank-customer agreement is that it doesn’t tell what it’s about, lol. It goes straight to the rights and obligations – for what!

The first provision outlines the duty to verify records of the customer. Provision 2: what happens when you don’t verify: you can’t recover lost amounts from the bank.

Provision 4: duty to set up internal controls. Lemieux: a customer is lending his hard-won money to a bank that charges obscene fees, and the bank so far talks about a customer’s obligations to the bank. Lemieux finds this outrageous, and wants to kick the banks halfway to Japan. Here, you are asked to set up controls that are designed to ensure security of your banking and prevent fraud in your account. In a corporation, this makes more sense. Lemieux works for a corporation that receives a $3 billion revenue, and the cheques exchanged are innumerable. How do you make sure that the employees (who have the signing authority) don’t defraud the company? E.g. an employee fabricates an invoice for an imaginary company (ordering some pipes) payable by his employer, then goes to his bank and pretends that he owns that company (and opens an account for that bogus company, presenting a fake charter). The money goes into his account. The preventive measures against this are: internal audits, requiring 2 signatures on the cheques, requiring a 2nd person to verify the validity of cheques, an invoice processing system, etc.

If the company doesn’t provide sufficient controls, should it bear the loss? We’ll look at that question for the next while. Lemieux: so if the customer has to set up controls, this duty should be reciprocal. Is that in the agreement? Of course not! Form of instructions. When a customer gives out a cheque to someone, he instructs the bank to pay the payee. Or make

a pre-authorized payment, or by telephone banking. It could be the customer, or someone authorized by him. E.g. if the customer is a corporation, the bank will ask for a resolution outlining all the people authorized to handle the account. The bank stipulates that it’s not liable for any transactions made by anyone from that list of people. E.g. if Lemieux, who has the authority to make transactions in the Gazmetro’s account, is fired tomorrow and instructs the bank to make fraudulent transactions, the bank will not be responsible to Gazmetro.

The order given to the bank to pay to the payee is a revocable one. A customer can instruct the bank to stop payment, and the cheque will not go through.

Lastly, “authority to debit” contains 2 elements. One is section 8 in the CIBC agreement – the bank can debit the customer if the cheque is refused (right of chargeback). Another is the bank’s ability to debit your account when you make payment.

Sidenote from today’s news (24 January 2008): a French bank, called Société Générale, discovered that one of its traders has “slipped under the radar”

A problem may arise if the revenue and expenses are in different currencies (e.g. U.S.A. and Canadian dollar). When the currencies become unequal in favour of expenses, the business suffers. To protect itself, a business will go to a bank and

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purchase a K, where, for a fee, the bank will guarantee the amount of one currency that can be purchased with another at 1:1 ratio (in the future). The bank, in turn, will go to the market and ask for the same K, and then re-sell the K to a higher customer for a higher fee. A bank will not expose itself to risks: it sells risks to a customer.

So, Société Générale is a huge bank. The trader knew all the security controls within the bank (because it was once employed by the bank to set those up!) and took a lot of unprotected positions on behalf of the bank (making no personal profit), causing the bank a loss of $7 billion. Unprotected positions occur where such a K is purchased with the view to speculate, rather than to protect one’s business.

Same story with the Bank of Scotland, and even the BMO, where one guy managed to take unprotected positions, which resulted in a loss of $700 million.

Bottom line: in bank-customer K’s, the customer is obliged to set up internal controls for its accounts. You’d want the banks to do the same. The news show what kinds of risks the banks are exposed to… can’t trust the banks.

4.2.1.2 The UCC provisions UCC is under constant review. Relevant UCC provisions: 4-214, 215, 301, 302 (Volume I, 171-174)

4-214 UCC (a)  If a collecting bank has made provisional settlement with its customer for an item and fails by reason of dishonour, suspension of payments by a bank, or otherwise to receive settlement for the item which is or becomes final, the bank may revoke the settlement given by it, charge back the amount of any credit given for the item to its customer's account, or obtain refund from its customer, whether or not it is able to return the  item, if by its midnight deadline or within a longer reasonable time after it learns the facts it returns the item or sends notification of the facts .  If the return or notice is delayed beyond the bank's midnight deadline or a longer reasonable time after it learns the facts, the bank may revoke the settlement, charge back the credit, or obtain refund from its customer, but it is liable for any loss resulting from the delay.  These rights to revoke, charge back, and obtain refund terminate if and when a settlement for the item received by the bank is or becomes final.

(b)  A collecting bank returns an item when it is sent or delivered to the bank's customer or transferor or pursuant to its instructions.

(c)  A depositary bank that is also the payor may charge back the amount of an item to its customer's account or obtain refund in accordance with the section governing return of an item received by a payor bank for credit on its books (Section 4-301).

(d)  The right to charge back is not affected by: (1)  previous use of a credit given for the item; or (2) failure by any bank to exercise ordinary care with respect to the item, but a bank so failing remains liable.

(e)  A failure to charge back or claim refund does not affect other rights of the bank against the customer or any other party.

(f)  If credit is given in dollars as the equivalent of the value of an item payable in  foreign  money, the dollar amount of any charge-back or refund  must be calculated on the basis of the  bank-offered spot rate for the foreign  money prevailing on the day when the person entitled to the charge-back or refund learns that it will not receive payment in ordinary course.

4-215 UCC (a)  An item is finally paid by a payor bank when the bank has first done any of the following:o (1) paid the item in cash; o (2) settled for the item without having a right to revoke the settlement under statute, clearing-house rule, or

agreement; oro (3) made a provisional settlement for the item and failed to revoke the settlement in the time and manner

permitted by statute,  clearing-house rule, or agreement.  (b)  If provisional settlement for an item does not become final, the item is not finally paid. (c)  If provisional settlement for an item between the presenting and payor banks is made through a clearing house or by

debits or credits in an account between them, then to the extent that provisional debits or credits for the item are entered in accounts between the presenting and payor banks or between the presenting and successive prior collecting banks seriatim, they become final upon final payment of the items by the payor bank.

(d)  If a collecting bank receives a settlement for an item which is or becomes final, the bank is accountable to its customer for the amount of the item and any provisional credit given for the item in an account with its customer becomes final.

(e)  Subject to (i) applicable law stating a time for availability of funds, and (ii) any right of the bank to apply the credit to an obligation of the customer, credit given by a bank for an item in a customer's account becomes available for withdrawal as of right: (1)  if the bank has received a provisional settlement for the item, when the settlement becomes final and the

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bank has had a reasonable time to  receive return of the item and the item has not been received within that time; (2)  if the bank is both the depositary bank and the payor bank, and the item is finally paid, at the opening of the bank's second banking day following receipt of the item.

(f)   Subject to applicable law stating a time for availability of funds and any right of a bank to apply a deposit to an obligation of the depositor, a deposit of money becomes available for withdrawal as of right at the opening of the bank's next banking day after receipt of the deposit.

4-301 UCC: (a) If a payor bank settles for a demand item other than a documentary draft presented otherwise than for immediate payment over the counter before midnight of the banking day of receipt, the payor bank may revoke the settlement and recover the settlement if, before it has made final payment  and before its midnight deadline, it

o (1) returns the item; o (2) returns an image of the item, if the party to which the return is made has entered into an agreement to accept

an image as a return of the item; and the image is returned in accordance with that agreement;o (3) sends a record providing notice of dishonor or nonpayment if the item is  unavailable for return.

(b)  If a demand item is received by a payor bank for credit on its books, it may return the item or send notice of dishonor and may revoke any credit given or recover the amount thereof withdrawn by its customer, if it acts within the time limit and in the manner specified in  subsection (a).

(c)  Unless previous notice of dishonor has been sent, an item is dishonored at the time when for purposes of dishonor it is returned or notice sent in accordance with this section.

(d)  An item is returned:o (1) as to an item  presented through a clearing house, when it is delivered to the presenting or last collecting bank

or to the clearing house or is sent or delivered in accordance with clearing-house rules; oro (2) in all other cases, when it is sent or delivered to the bank's customer or transferor or pursuant to  instructions.

4-302 UCC (a)  If an item is presented to and received by a payor bank , the bank is accountable for the amount of:o (1) a demand item, other than a documentary draft, whether properly payable or not, if the bank, in any case in

which it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or,  whether or not it is also the depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline; or

o (2) any other properly payable item unless, within the time allowed for acceptance or payment of that item, the bank either accepts or pays the item or returns it and accompanying documents.

(b)  The liability of a payor bank to pay an item pursuant to subsection (a) is subject to defenses based on breach of a presentment warranty (Section 4-208) or proof that the person seeking enforcement of the liability presented or transferred the item for the purpose of defrauding the payor bank.

Sidenote: how relevant is this course internationally? Although each jurisdiction has its own system to regulate banks, the basic tenets of the banking law come from custom, which is very similar across jurisdictions. The concepts are very similar. The concepts in negotiable instruments is universal: North America, Europe, China, Japan.

The provisions of the UCC are very interesting to study comparatively. Compare them to Rule A4 as applied in Stanley Works and National Slag.

The universal feature of negotiable instrument is their revocable nature. The transfer of money is revocable – but with a limitation period (A4 doesn’t provide any sanctions for its breach though). The caselaw fills the void and interprets it…contradictorily (compare C.A Ontario with C.A. Québec). Only one element was agreed on: the rules do not benefit 3rd parties (customers), but rather operate between the banks.

UCC can probably amended by K, but probably cannot be contracted out of.

Lemieux’ explanation of the UCC provisions 4-214 UCC: the right of chargeback. If, for any reasons, the instrument sent for collection is not paid, the bank can debit

the customer. Why might the instrument not be paid? The paying bank goes bankrupt, there are insufficient funds, there is a remanding order, etc. But there could also be no reason at all – the paying bank, out of pure discretion, may dishonour a cheque! If a bank does that, it will have a conflict with its own customer (e.g. when that customer loses some services it paid for just because a bank refused the transfer). The UCC ends the R of chargeback when the payment by the paying bank is final, though (see 4-215). The payment by the paying bank can become, or deemed to become, final – at that

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point, the presenting bank will be unable to debit its customer anymore. Remember, in Canada, after 2 days there is a good chance that a cheque has gone through. In the U.S.A., there is a specific point in time when that happens.

4-215 UCC: final payment occurs when the payment is made in cash, or when the paying bank has no right of revocation. E.g. a certified cheque, as a general rule, cannot be returned to the clearing (unless there is material alteration). There is very limited R of return given to the paying bank when a cheque is certified – in Canada as well.

Most importantly, an item is finally paid when the paying bank failed to return the instrument in the time and manner provided by the rules (subs. (a)(3)). Just like the interpretation in Stanley Works! In this situation, the instrument is deemed to have been paid finally. Had these principles been applicable in Canada, National Slag would be decided otherwise. So the U.S.A. banks are unable to behave the way the Canadian banks can, under National Slag.

Remember that there is no police monitoring the returning of instruments. Strictly speaking, a paying bank is free to return an instrument at any point, and the presenting bank has no means of resisting it (because all is done electronically). What happens in the U.S.A.? If an item is deemed to have been paid by the paying bank, the paying bank becomes liable to the presenting bank should it return the instrument outside of the time limit.

Bottom line: in Canada, there is a gray area when an instrument is paid, where the parties are uncertain whether the transaction went through. In the U.S.A., it’s a final and certain thing.

4-302 UCC: an interesting provision. The paying bank is accountable for the amount of the cheque returned outside of the time limit provided by the clearing rules (“the midnight deadline”). Think back to the situation where the payee customer is provisionally credited, and then debited. The pissed-off customer takes an action against both the paying and the collecting bank. In both National Slag and Stanley Works, the courts held that the customer vs. paying bank action should be rejected. There is no duty owed by the paying bank to the creditor of the cheque. The clearing rules do not govern such relationships. UCC is directly the opposite. The paying bank, under UCC, is accountable to the world, including the creditor of the cheque.

The main difference between the UCC and the Canadian rules, according to Lemieux, is that under UCC there is a definite time when all parties are sure that a cheque has gone through with finality. In Canada, things are not as clear. It’s up to the courts to decide whether, in the given circumstances, the right of chargeback may no longer be exercised by the collecting bank.

4.2.2 Implicit obligations Sometimes there is no standard agreement between a customer and a bank. With big players, such as governments or large

corporations, there is sometimes a requirement to enter into an agreement, and the customer may have bargaining power; but not so with small players.

The Bank Act and the Bills of Exchange Act affect the banker-customer relations. But there is no specific chapter in either of the laws entitled “banker-customer agreement.” (unlike UCC)

In fact, this area of law is very layered. Many things comprise the banker-customer relationship: BIA, Money Laundering Act – all affect the relations.

1.1.1.8 Bank of Montréal v. A.G. of Québec (1975, C.A. Québec)Facts The government of Québec issued a cheque to a 3rd party (compensation for expropriation), drawn on its bank (Δ

BMO). A notary, who received the cheque, forged it by changing the payee name to his and deposited it to his bank of Caisse Populaire. BMO debited the government’s account. The government learned of the forgery and demanded its money back from BMO – more than 1 year later. Sections 49(3) and (4) of Bills of Exchange Act require a customer to inform the bank of forgery within one year – to be able to claim compensation.

Holding BEA adds to implicit obligations of a bank not to pay to forged cheques. But limitation period defeats action.Reasons The K btw a bank and its customer is supplemented by the banking customs and the law (e.g. BEA). “There is

no doubt that a banking contract between a banker and his client includes an obligation on the part of the banker not to pay a cheque to one who is not entitled to it”

When this implicit obligation is breached, a customer has a right of action against the bank, but BEA further imposes a condition that the action must be brought within 1 year.

Sidenote The π here tried to rely on Crown prerogative – immunity from limitation. This argument failed.

First of all, why was the notary be in possession of the cheque? Very ironic: it’s a classic seller-buyer insecurity – who will send goods/money before the other one does? In the past 2000 years creative minds have come up with many solutions to overcome this insecurity. One of the techniques is the use of a intermediary, such as notaries (who are

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supposed to have integrity and honesty as a job requirement). If you are a buyer with cash, you give the cash to the neutral notary, and instruct the notary to give the money to the seller only upon receipt of the seller’s goods.

Here, the government expropriated property and reimbursed the owner, Sheedo Construction. But it wanted Sheedo to sign the documents affirming the passing of title to the government before paying. The cheque in question is payable to two persons: to the notary and to Sheedo. Once the documents were signed by Sheedo, the notary would deposit the cheque into Sheedo’s account.

Common feature with Tayeb : in Tayeb, the electronic funds transfer was another way of safe transaction. Lemieux: “notaries are a sub-form of lawyers” CRAWFORD (636) the S.C.C. has also recognized the importance of commercial custom and usages as well as law in

filling out the terms of ordinary banking K’s. In BMO v. AG Québec the J referred to art. 1017 C.c.L.C (now 1426 C.c.Q: “In interpreting a contract, the nature of the contract, the circumstances in which it was formed, the interpretation which has already been given to it by the parties or which it may have received, and usage, are all taken into account.”) to incorporate accepted commercial customs into the K btw the bank and the province, but his citation of the English authorities indicates that the result would have been the same if the common law had applied to the facts.”

Also, the theory is that by receiving a deposit, the bank expressly or impliedly contracts to repay it in accordance with the instructions of the customer. Payment on a forgery of the drawer’s signature is made without authority and must be repaid.

4.2.3 The BEA provisions 48 BEA : if there is forged endorsement – it’s as if the cheque were not signed. Conditions for suing – must give a notice

to the payer, within reasonable time, of your discovery of the forgery (subsection (3): “within one year after the person seeking to recover the amount has acquired notice that the endorsement is forged or unauthorized”).

According to 49(3) BEA: the government in this case must give notice within a reasonable time. The government waited for 2 years before giving notice. The big debate in the case is this procedural element.

It’s not clear whether the bank & the customer has an explicit K-ual agreement. Page 305 text: “There is no doubt that a banking contract between a banker and his client includes an obligation on the part of the banker not to pay a cheque to one who is not entitled to it.” So as long as the customer consents, the banks can freely pay the funds to others; but without such consent, the bank will be liable. That’s an implicit rule that the court relies on in this jgmt.

Let’s imagine the drawer’s signature was forged (a government official’s signature forged) – we still have the same problem, on general principles. There is deficiency in authorization of such a payment. 48/49 BEA state that forged signatures are no signatures.

144 BEA : “materially altered” instruments. If a cheque is made without the knowledge of the government, the material alternation deprives the cheque of any validity. E.g. if the notary added a “0” to the sum, it would have been an unauthorized payment.

167 BEA: countermand order and death of the customer also deprive the bank of authority to pay out the customer’s funds. In bankruptcy, only the trustee can sign the cheques, no one else. 438 Bank Act: unclaimed balances : after 10 years of

inactivity, the bank can close the account and send the unclaimed amount to the Bank of Canada, and be discharged vis-à-vis its customer.

The Crown argued that 49 BEA does not apply to it. Court: the K-ual (or implicit) agreement includes section 49 BEA. And the Crown is bound by the K in which it enters. A banking K is a “vase” tree which can receive other sources. So 49 BEA applies, and the Crown lost its ability to sue due to failure to notify the bank within reasonable time.

One can K out of such provisions explicitly.

4.2.4 The Bank Act provisions 413 Bank Act (1) A bank shall not accept deposits in Canada unless

o (a) it is a member institution, as defined in section 2 of the Canada Deposit Insurance Corporation Act; oro (b) it has been authorized under subsection 26.03(1) of that Act to accept deposits without being a member

institution, as defined in section 2 of that Act. 437 Bank Act. (1) A bank may, without the intervention of any other person,

o (a) accept a deposit from any person whether or not the person is qualified by law to enter into contracts; ando (b) pay all or part of the principal of the deposit and all or part of the interest thereon to or to the order of that

person. (2) Paragraph (1)(b) does not apply if, before payment, the money deposited in the bank pursuant to paragraph (1)(a) is

claimed by some other person: (a) in any action or proceeding to which the bank is a party and in respect of which service

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of a writ or other process originating that action or proceeding has been made on the bank, or (b) in any other action or proceeding pursuant to which an injunction or order made by the court requiring the bank not to make payment of that money or make payment thereof to some person other than the depositor has been served on the bank, and, in the case of any such claim so made, the money so deposited may be paid to the depositor with the consent of the claimant or to the claimant with the consent of the depositor.

440 Bank Act: A bank shall not, directly or indirectly, charge or receive any sum for the keeping of an account unless the charge is made by express agreement between the bank and a customer or by order of a court.

441 Bank Act: (1) A bank shall not open or maintain an interest-bearing deposit account in Canada in the name of any natural person unless the bank discloses, in accordance with the regulations, to the person who requests the bank to open the account, the rate of interest applicable to the account and how the amount of interest to be paid is to be calculated.

(2) Subsection (1) does not apply in respect of an interest-bearing deposit account that is opened with a deposit in excess of $150,000 or any greater amount that may be prescribed.

442 Bank Act: No person shall authorize the publication, issue or appearance of any advertisement in Canada that indicates the rate of interest offered by a bank on an interest-bearing deposit or a debt obligation unless the advertisement discloses, in accordance with the regulations, how the amount of interest is to be calculated.

445 Bank Act: (1) Subject to subsections (2) to (4), a bank shall not open a deposit account in the name of a customer unless, at or before the time the account is opened, the bank provides in writing to the individual who requests the opening of the account

o (a) a copy of the account agreement with the bank;o (b) information about all charges applicable to the account;o (c) information about how the customer will be notified of any increase in those charges and of any new charges

applicable to the account;o (d) information about the bank’s procedures relating to complaints about the application of any charge applicable

to the account; ando (e) such other information as may be prescribed.

(2) If a deposit account is not a personal deposit account and the amount of a charge applicable to the account cannot be established at or before the time the account is opened, the bank shall, as soon as is practicable after the amount is established, provide the customer in whose name the account is kept with a notice in writing of the amount of the charge.

(3) If a bank has a deposit account in the name of a customer and the customer by telephone requests the opening of another deposit account in the name of the customer and the bank has not complied with subsection (1) in respect of the opening of that other account, the bank shall not open the account unless it provides the customer orally with any information prescribed at or before the time the account is opened.

(4) If a bank opens an account under subsection (3), it shall, not later than seven business days after the account is opened, provide to the customer in writing the agreement and information referred to in subsection (1).

(5) A customer may, within 14 business days after a deposit account is opened under subsection (3), close the account without charge and in such case is entitled to a refund of any charges related to the operation of the account, other than interest charges, incurred while the account was open.

(6) For the purposes of subsection (4), the Governor in Council may make regulations prescribing circumstances in which, and the time when, the agreement and information will be deemed to have been provided to the customer.

446 Bank Act: A bank shall disclose, in the prescribed manner and at the prescribed time, to its customers and to the public, the charges applicable to deposit accounts with the bank and the usual amount, if any, charged by the bank for services normally provided by the bank to its customers and to the public

447 Bank Act: (1) A bank shall not increase any charge applicable to a personal deposit account with the bank or introduce any new charge applicable to a personal deposit account with the bank unless the bank discloses the charge in the prescribed manner and at the prescribed time to the customer in whose name the account is kept.

(2) With respect to such services in relation to deposit accounts, other than personal deposit accounts, as are prescribed, a bank shall not increase any charge for any such service in relation to a deposit account with the bank or introduce any new charge for any such service in relation to a deposit account with the bank unless the bank discloses the charge in the prescribed manner and at the prescribed time to the customer in whose name the account is kept.

448.1 Bank Act: (1) Subject to regulations made under subsection (3), a member bank shall, at any prescribed point of service in Canada or any branch in Canada at which it opens retail deposit accounts through a natural person, open a retail deposit account for an individual who meets the prescribed conditions at his or her request made there in person.

(2) A member bank shall not require that, in the case of an account opened under subsection (1), the individual make an initial minimum deposit or maintain a minimum balance.

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4.2.5 Proceeds of Crime (Money Laundering) & Terrorist Financing Act Banks unfortunately can provide a money laundering opportunity to criminals. You deposit “dirty” money into a bank and

then write out legitimate cheques. Banks can also be used to finance terrorist activity. People became very sensitive to that in 2001, and in the weeks that

followed the 9/11 WTC terrorist attack, the U.S.A. came up with the U.S.A. Patriot Act. The Act set up a lot of controls for banks and account holders to prevent terrorist sponsorship. Tayeb came before such a reform in the UK.

Pay attention to the functioning of CHAPS. We’ll cover it next class.

1.1.1.9 Tayeb v. HSBC Bank (2004, UK finst commercial court)Facts Π is a businessman with a Tunisian passport, who does not reside in UK. He opened an account at the HSBC bank

in Derby, UK, in 2000, in anticipation of a business deal with a Libyan government corporation. The negotiations were successful, and the Libyan corporation transferred £944,114 as payment into π’s account in HSBC. The payment was done through the CHAPS system, which provides real-time transfer of money btw banks. The π’s account was credited. A manager in HSBC, however, became suspicious that the transfer smelled like money laundering, and put a marker on the account (freezing it). He was aware of the UK Criminal Justice Act provision (93) which makes it a criminal offence to abet a money launderer. The manager met with the π the next day to get an explanation of the transfer. The π explained, but the manager did not believe him. Shortly after, the manager transferred the money back to the account of the π’s debtor (at Barclays Bank). The π did not try to recover that money from his debtor, but instead sues HSBC for debt (once his account was credited, the bank owes him).

Holding The bank owes £944,114 to the π.Reasons CHAPS system operates such that payments are cleared the day on which they are made, and the banks settle

btw themselves immediately. The CHAPS rules require authorization of the client should the funds be returned. This means that the bank

who has accepted funds from another does not hold them as an agent of the payee, but rather as a debtor to its own customer.

One of the bank’s K-ual duties to the client is to credit the client’s account when it receives funds from external sources. A bank can refuse payment when the amount is less than the minimum permissible amount, or when a payee’s cheque is post-dated, or where a transaction is prohibited by law (e.g. if Libya had international sanctions imposed on it). But commercial un-desirability of transfer does not entitle the bank to refuse the deposit: the K-ual obligations to the client cannot be ignored.

The bank manager did not report his suspicion to a money laundering officer or his supervisor. Instead, he simply wired the funds back. The Act states a requirement of disclosure of a suspicion to a constable or, if the suspicious person is an employee, to the appropriate supervisor. It says nothing about the return of suspicious funds to the payee (in fact, Money Laundering Guide advises banks not to terminate their relationship with a suspicious customer before consulting with an investigating officer, so as not to tip-off the criminals). The act of reporting provides a statutory defence to abetting of money laundering.

The CHAPS rules make no mention of the return of non-erroneous payments. “There must therefore be the very strong implication that following application to the customer’s account, in the absence of error, the banking practice relating to CHAPS transfers is that they are ordinarily irreversible.”

There is no unavoidable inconsistency btw compliance with CHAPS and with the Act. If a bank entertains suspicion about funds, it can still credit the customer, report the suspicion to authorities and freeze the account meanwhile so that no funds are taken out of it. They can also apply to court for directions.

A bank is impliedly authorized by a customer to accept credit, and the bank’s consent to receiving banks is not necessary. Neither is the client’s being informed of the transfer necessary for the finality of a transfer.

The fact that the bank put a marker on the π’s account does not relieve it of its debt. The freezing of the account simply means that the bank won’t release the funds to the customer on demand until investigation, but the bank is still indebted to the customer for that amount.

At 2 pm the receipt of the CHAPS payment was made, and the π delivered the title to the property he was selling to the Libyan corporation. So the buyer sent the money before receiving the goods. Tayeb was a very prudent seller… and then the bank sends the money back!!

If you are the collecting bank, there is no certainty of the transaction until the funds are received. Tayeb first wanted to use the Hong Kong Bank in England, and deliver the draft to them, draw on the Suez Canal Bank. But the HK Bank told

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him that the funds would not be available for at least 3 weeks – the time it gets to collect the funds from SC Bank. The HK Bank also suggested to use electronic transfer.

Tayeb insisted on payment before delivery. Parties can also always agree on the method of payment. In fact, the agreement btw the parties on the method of payment is just as important as agreement on other essential elements of the K.

The transfer used by Tayeb is known as “same day funds.” The J does not believe Tayeb’s story. But this has little relevance. The crucial thing is that the bank manager sent the

money back without Tayeb’s authority. The Bank tried to argue that there was no debt owing to the customer when the funds were received, because the Bank

retains a discretion with respect to the funds. We are not referred to any std-form K. Either there was no K, or there was no applicable provision in that K. We are looking at pure common law of banking. Can we imply a discretion on the part of the bank to accept/not accept funds?

Let’s consider how CHAPS works, compared to cheques . When a payment is made by cheque, the payer delivers a cheque to the payee. The cheque is sent to the payee’s bank (there is a provisional credit), the cheque is sent through the clearing system. Both the paying and payee bank has an account at the Bank of England. The account of the collecting bank is credited by the amount at the Bank of England, and the account of the drawee bank is debited (netting). This settlement is provisional. The payer bank checks the availability of funds of the payer, etc., and then the transaction is complete. This system is called “debit-pull” – the amount is pulled from the payer. This is the fundamental difference with CHAPS and other electronic fund transfers, which are known as “credit push.”

CHAPS has its equivalences across the world; in the U.S.A., it’s known as something like “Fed Wire” In electronic transfers, there is no payer. The payer gives an instruction to its bank to pay – usually, the customer must

sign a written document and provide the details of the payee account. The payer’s bank is connected with the CHAPS banks through special computer software. The payer bank introduces a payment instruction into the software, which causes a request of the Bank of England to credit the payee bank’s account and debit the payer bank’s account (i.e. to settle). The Bank of England sends the confirmation of the adjustment to the payer bank, which then notifies the payee bank. The payee then confirms that it has, in fact, received the funds. One important rule: once the confirmation of receipt is sent by the payee bank to the payer bank, the payee bank agrees to make the funds available to its client. So it’s not from the payer’s account that the funds are pulled, but from the payer’s account that the funds are pushed. The process happens in the same day – so the payer must come before a certain hour in the day in order to execute the transfer.

The heart of the matter, to Lemieux, is that: if you open an account that is eligible for CHAPS transfers, and if there are no K-ual terms to the contrary, the customer can reasonably expect that a bank will abide by those rules.

The rules say that once the receipt of funds is confirmed by the payee bank, the customer has the R to get access to the funds. And there we go. But the CHAPS rules do not state that the transfer is irreversible. Does this make a difference? In any std-form agreements that we sign, there is no mention of any rights or obligations regarding transfer of funds.

The CHAPS system is a successor to “Town Clearing.” The very first case we looked at, Barclays v. Bank of England – two systems, the normal one, and the “town clearing” system. That was a system for cheques for large amounts. This system was very much like the normal procedure, except when the cheques were presented to the payer bank, the payer bank had to make its decision immediately, so that clearing was final on the same day. The special concern with large cheque is that there would be huge interest payments within one day. There is a greater concern for systemic risk for such cheques.

The HSBC worried about becoming a constructive trustee for a money launderer or an abetter. It argued that it had a discretion on acceptance of the funds, due to its suspicion. But such a discretion would ruin the efficacy of the system – perhaps another factor that played out in the jgmt.

Freezing an account is different. The Bank can call the money laundering authorities and have them send an order to freeze the account. Or the bank can freeze the account and then advise the authorities. This is still possible, even though the bank breaches its obligation to provide funds to the customer. If the suspicions prove to be groundless, and if the agreement does not provide for freezing, the bank will face liability. We’ll look at BMP Global. What if the bank does not freeze the account and advises the authorities? It avoids liability to its customer and the criminal liability, but it may be liable (extra-contractually) to a 3rd party whose money the customer stole… poor bank. It’s a case by case analysis though.

Travel agents are required by law to establish a trust account. Who is the customer of the bank – the travel agent or the beneficiaries of the trust account?

Me: bottom line – there are several considerations, namely:o Pure CmL of banking affects the customer-bank Ko CHAPS rules and the desire of commercial efficacy may affect the customer-bank K

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o Anti-terrorist legislation may affect customer-bank K

4.3 PAYING INSTRUMENTS DRAWN ON CUSTOMER’S ACCOUNT

4.3.1 The requirement of authority 437 Bank Act (Volume I, page 107). (1) A bank may, without the intervention of any other person, (a) accept a deposit

from any person whether or not the person is qualified by law to enter into contracts; and (b) pay all or part of the principal of the deposit and all or part of the interest thereon to or to the order of that person. (2) Paragraph (1)(b) does not apply if, before payment, the money deposited in the bank pursuant to paragraph (1)(a) is claimed by some other person (a) in any action or proceeding to which the bank is a party and in respect of which service of a writ or other process originating that action or proceeding has been made on the bank, or (b) in any other action or proceeding pursuant to which an injunction or order made by the court requiring the bank not to make payment of that money or make payment thereof to some person other than the depositor has been served on the bank, and, in the case of any such claim so made, the money so deposited may be paid to the depositor with the consent of the claimant or to the claimant with the consent of the depositor. (3) A bank is not bound to see to the execution of any trust to which any deposit made under the authority of this Act is subject. (4) Subsection 3 applies regardless of whether the trust is express or arises by the operation of law, and it applies even when the bank has notice of the trust if it acts on the order of or under the authority of the holder or holders of the account into which the deposit is made.

But even without this provision, the duty of the bank to return the amount deposited exists. The Bank Act formalizes the rule.

One element of the rule that’s important: the bank may repay the money to the depositor, or to the order of the depositor. This is a standard feature of payment, found also in 1557 C.c.Q. (“Payment shall be made to the creditor or to the person authorized to receive it for him.”) A debtor may pay directly to the creditor, or to a person authorized by the creditor to receive the money. In other words, the debtor can pay to the creditor’s creditor. This happens every day: you go to the grocery store, buy food, and pay with your debit card : the bank pays your creditor – the grocery store.

How do we make sure that such a payment is truly authorized by the customer? The debit cards and the associated computer networks ensure security. But sometimes business is done on the phone. Verbal authorisations can sometimes get misunderstood.

El-Zayed case illustrates this last situation very well. Mr. El-Zayed was a resident of Cairo and had $500,000 deposited in the bank of Nova Scotia in Halifax. He had a habit of gambling in Cannes, Monaco, Atlantic City and Las Vegas, lol. One day the bank of Nova Scotia received a “telex” (which is like a fax) from a bank in Reno. The fax, unsigned, said “please remit $250,000 to the interstate bank of Reno per request of El-Zayed with the passport number such-and-such” The Bank of Nova Scotia complied. El Zayed then sued the bank of Nova Scotia, claiming the transaction was made without his authority.

When a bank pays someone without the authorization of the customer, it will be personally liable to the customer. The facts came out: El-Zayed was in Reno, gambling with friends. At one point, he ran out of money. He wanted to

continue gambling, but the casino wanted some security. And so El-Zayed, with the casino manager in tow, went over to the first interstate bank, and asked the money from Halifax to be wired to Reno, for the security. A bank rep from Reno called the Halifax bank, asking to arrange the transfer of funds. The branch manager in Halifax said “sure,” which was rather idiotic. Any half-brained bank manager would get a signed letter from El-Zayed, which would evidence the customer’s authorization in order to justify debiting of the customer’s account.

El-Zayed argued that he changed his mind at the bank of Reno. But his story didn’t make any sense. The trial J did not believe El-Zayed, and decided that El-Zayed did, in fact, give verbal authority for the transfer.

This case was expensive (witnesses were spread out across countries, and had to be flown to the place of trial). The lesson to be learned: GET WRITTEN AUTHORIZATION, lol.

4.3.2 Exculpatory clauses in std-form K’s: “verification agreement”

1.1.1.10 Arrow Transfer Co. v. Royal Bank of Canada, BMO (1972, S.C.C. from BC)Facts Π is a company whose employer forged 73 cheques and made them payable to himself or to his fictitious

businesses (drawn on π) over 5 years. The π’s bank, RBC, debited the amounts on those cheques to the π’s account. The drawer bank, which the forger employee used, is BMO. Π sues RBC for paying out its money with π’s authority, and sues BMO for conversion.

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Held The exculpatory clause in RBC’s K with π relieves RBC of liability. BMO not liable either.Reasons The K btw π and RBC obliges the customer to verify correctness of each statement, and “notify the Bank in

writing” within 30 days “of any alleged omissions from or debits wrongly made to or inaccurate entries in the account” after which the account becomes conclusive evidence that all entries are correct.

“Debits wrongly made” extend to forged cheques – there is no reason to limit this wording. The K-ual terms are not ambiguous. The provisions of the K are valid and therefore protect RBC from liability

With respect to BMO, it was not the recipient of the money (the rogue was), so it did not convert the cheques.

Page 296 (dissent by Laskin J): the books of Arrows were not balanced “for years.” That’s very bad practice. The rogue employee was not supervised at all. And the people who hired him knew that the rogue was suspicious from the start: this guy was actually fired from a previous job because he could not be trusted (LOL). With such searing negligence on the part of Arrows, how can the Bank be blamed? A trial J will naturally react by blaming the blameworthy.

The majority, in mere 3 pages, simply “renders homage to K law.” The bank-customer K contains a verification agreement, and that’s why π loses.

Verification agreement: customers have a duty to read the agreement, and also to send notice if anything is wrong in the account; and if no notice is given, the Bank can assume that all is good (π is prevented from suing). This is quite strong, and rare. Among merchants, this agreement would never come up, for example.

Bottom of page 291: in Canada, when the first cases of customers against banks came up, the courts failed to recognize an (implicit) duty of the customers to verify accounts and give notice of irregularities. In the U.S.A., the common law of banking, on the other hand, did lead the U.S.A. Supreme Court to recognize that duty. This led to the codification of the duty in the UCC, art. 4-406. This is codification of the jurisprudence of the late 19th C.

Canadian banks responded by including the verifying agreement in their K’s with the customers. Let’s compare 4-406 UCC and the Canadian std-form agreements. UCC: notice must be given within specified time, after

which you cannot sue the bank. But para.(e) also says that even though, in a given situation, a customer may have failed to give notice within the specified time, if the customer proves that the Bank failed to exercise ordinary care in paying the item, the loss will be shifted onto the bank..

Question: how far does the verification agreement (limiting liability of the Bank) go? Arrow Transfer clause: according to the Bank, as far as it can possibly go! In one case a bank manager was the rogue who stole money from the π’s account and put it into another customer’s account (playing Robin Hood, diverging funds from the rich to the poor), and the bank invoked the verification agreement! That’s just ridiculous, and insulting to the π.

1474 C.c.Q.: exculpatory clauses become null when the Δ is grossly negligent. “Gross negligence” is a gray area. If you take this provision to the limit, exculpatory clauses would never apply. And how can anyone tell whether a signature belongs to the right person? In different circumstances, handwriting varies. Should the bank attempt to verify the signature on every single cheque, comparing it to the specimen given by the customer at account opening? That’s impossible. If a rogue is skilful enough, the verification of the signature will be altogether useless. A bank teller has no training in signature fraud detection. In fact, the person in the best position to verify is the customer. Commercially speaking, the shifting of responsibility onto the customer to verify cheques makes a lot of sense. That’s what the U.S.A. courts thought, too.

But there must be a limit . E.g. a case of a small Alberta company where the president of the company goes to see the branch manager and informs him that from now on, only 1 signature would be required on cheques, instead of 2 signatures. The branch manager asks for the resolution. The president asks the manager for… a blank resolution form and a pen, and writes one up in front of him! The branch manager says “okay” (LOL). The next week, a cheque for $60,000 payable to a BMW dealer comes through, and then the president flees. A year later, the company goes bankrupt and the liquidator sues the bank.

In Québec 1474 C.c.Q. is applicable. In CmL there are also defences to exculpatory defences. So in principle, these verification agreements make very much sense, but to a limit. In Arrow Transfer: no duty imposed on the customer to establish internal controls within the company. Historically, that’s

how it was, up until 1990’s.

4.3.3 The duty to set up “internal controls”

1.1.1.11 Canadian Pacific Hotels v. BMO (1987, S.C.C. from Ontario)Facts Similar to Arrow Transfer. A rogue employed in a financial center of the company forged the names of the signing

reps on a number of cheques, and made them payable to a bogus company established in his name. “The responsibility for the bank reconciliations based on the daily bank statements and disbursement records as

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delegated to the [rogue].” But there, no K btw the Bank & the company, and consequently, no verification agreement (very weird). Forensic accountants established that the internal controls within CP Hotels were “deficient” (maybe not as much as in Arrow Transfer though..) The bank argued for implicit duty to set up internal controls, and invoked the exception in 48(1) BEA.

Holding CP Hotels owed no duty to set up internal controls: they are not precluded from relying on 48(1) BEA rule.Reasons 48(1) BEA: forged signature invalidates cheque, except where person who argues forgery is precluded from

doing so. The bank argues that failure to verify accounts & set up internal controls precludes the company from relying on 48(1) BEA.

Majority held that no such duty is owed by the customer to the bank, unless it appears in their agreement. The JJ refused to affirm this duty limited to a class of “sophisticated commercial customers” – all customers are to be treated the same (otherwise, there would be unacceptable uncertainty).

While “there is no doubt that the implication of terms in a K on the basis of custom or usage is a well recognized category of implication … [in] commercial K’s,” this custom must rest on presumed understanding btw the customer & the bank that the duty exists. No evidence of such understanding in the case at bar.

Another means to imply a term in a K is reasonableness or necessity. But again, this duty is not necessary in the absence of verification agreement, and should not be imposed by judicial decision. “If banks consider it to be necessary they may insist on verification agreements or obtain appropriate legislation if they can.”

4.4 COLLECTION OF INSTRUMENTS DEPOSITED INTO CUSTOMER’S ACCOUNT

1.1.1.12 BMP Global v. Bank of Nova Scotia (2007, BC C.A.)Facts Π’s is a company called BMP Global. It’s a customer of Bank of Nova Scotia (BNS). BMP received a cheque

with forged signatures payable to it, and deposited it into its account at BNS. BMP had nothing to do with the fraud, it was a completely innocent party. In a series of strange dealings, BMP actually gave no consideration for the cheque – i.e. it was a total windfall. After the deposit, BMP issued cheques to several of its agents, drawing on the windfall. The drawee bank, RBC, soon realized that the signatures were forged and asked BNS to help it out (I suppose RBC returned the sums to its own customer). BNS debited its customer BMP and returned the funds to RBC. It also unilaterally traced the money given out by BMP to other accounts, and debited those accounts, too. BMP claims that BNS breached its banker duties, and claims entitlement to the funds, even though they are fraudulent windfall.

Held BNS not entitled to money due to equitable principles, despite BNS’ breach of banker duty to honour transfersReasons BNS’ retention of the money would be UJE with respect to BMP. Although it’s the RBC that would actually be

impoverished… The vibrant law of equity prevents parties from retaining property which in good conscience they should not be

permitted to retain “One might ask whether the court should give a monetary jgmt which will accomplish the substance of fraud.”

Also, there is a broad principle that “a person cannot avail himself of what has been obtained by the fraud of another, unless he not only is innocent of the fraud, but has given some valuable consideration.”

For BNS’s breach of duties: a nominal damages of $1 Tracing by BNS, on the other hand, was unauthorized. The cheques drawn on BMP’s account were not

forged, and were not made in BF. BNS therefore has no R to debit those accounts.

Important distinction between “forged cheques” and “forged endorsements” A forged cheque is where the name of the payee is scratched out and replaced by that of a rogue. An endorsement is a

signature at the back by the payee. This allows the funds to be transferred by a simple delivery of the instrument. Typically, in order to assign a claim, you need to give notice to the account D. When a cheque is endorsed, it is basically

an assigned claim, but without the notice to the debtor. This is a unique feature of negotiable instruments. Forged endorsement: a cheque is properly drawn, but meanwhile someone not authorized grabbed it and forged a signature

of the payee. What is the common feature of the two situations? A cheque is an instruction to the bank from the payee. When you have

a forged endorsement, a cheque payable to A or someone authorized by A is paid to a rogue, B – without the authority of the payer.

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BMO v. AG of Québec: forged endorsement case. The government of Québec sued its bank, on the basis that its account was debited without authority. The cheque bearing a forged endorsement was not paid to the original payee/ a person authorized by the payee. Court: the bank is at fault. Arrow Transfer and CP Hotels has to do with forged cheques.

Take a look at the std-form agreement btw CIBC and its customers, in the casebook. Keep in mind that even in the absence of such an agreement, there would be a legal relationship btw banker & customer.

“Chargeback provision” and “holdback provision.” Holdback means that the funds deposited via cheque will not be available to the customer until the cheque is cleared. The funds will be “frozen.” This is typically posted at ATM machines, in bank pamphlets.

o When a customer is new, the bank freezes the account for a long period of time, e.g. 30 days. The bank is not obliged to take the risks with new people who may turn out to be fraudsters.

A typical std-form agreement does not say everything, though. For example, it does not say how much interest the bank gives you, nor what fees you pay. It says “you’ll pay the fees that CIBC establishes, from time to time.” Also, CIBC agreement makes no mention of freezing funds at any time (some other agreements do talk about that – look at page II-428 of casebook, §10.1.8, give notice to the bank 2 days before withdrawing large amounts, and also further to a deposit of an item, funds may be held by a bank …until the item has been paid”). This is a prudent approach, but not very commercially efficient.

In the alternative, if the funds are taken by the customer after a cheque is deposited, and the cheque does not go through, the Bank may stipulate a chargeback provision. Go to the CPA site: there is a policy statement to which banks must adhere. Here in Canada there is very little regulation of bank accounts – a lot of regulation comes from the CPA rules, it’s an auto-regulation; and the legislator has enough trust for the industry not to interfere. Sometimes, if need be, a minister may threaten banks to create a regulation, telling them that there will be legislative change unless the banks get together and modify their rules. For a chargeback agreement, look at II-425, §8(ii).

Cases on chargeback that we’ve already seen: National Slag and Stanley Works. Now we deal with BMP Global, and we’ll also look at BMO v. Legault later.

BMP Global is one of the weirdest cases Lemieux has ever read in his life. When BMP brings the $900K cheque to its bank, the bank is naturally concerned. The branch manager decides to give a provisional credit to the company, but holdback the funds for some period of time. He also photocopies the cheque and sends it to the paying bank, asking if (i) there are available funds in that account, and (ii) if the signatures are true. The answers are affirmative. The manager also asks BMP where the money is coming from. BMP explains that they entered into negotiations with a 3rd party for the sale of some of BMP’s distribution rights (a sub-license). But the party on whom the cheque is drawn is not that negotiation partner. In fact, it was unknown to BMP.

The bank manager asks for the K (sale of distribution rights). There is no K. How was the cheque received? In an envelope, from an unfamiliar sender.

The cheque is cleared, but the manager holds the funds back for another few days, for a total of 10 days. There is no K-ual basis for this practice : no holdback provision in the K btw BMP & BNS. This is left to be dealt by banking customs…

10 days have elapsed, the drawee bank gave encouraging answers, BMP is demanding the money. Here in Canada, we cannot be sure when the cheque is definitively cleared, but after 10 days, you figure that it’s good. So BNS makes the funds available to BMP. BMP wires the money to everyone possible. Still, a large amount remains in the account. Then finally the drawee bank contacts BNS and says that the cheque was a “clone cheque” bearing forged signatures. Usually cheques have security features (company logo, magnetic strips, watermarks, etc.). Clone cheques are reproductions of real cheques! So the drawee bank asks BNS to freeze BMP’s account and promises to indemnify BNS for any liability (the drawee bank was of course outside of time delays for returning the cheque).

The drawee bank would be liable to its customer for unauthorized payment of the cheque – the customer gave notice of irregularity in its account well within 30 days. The drawee bank, RBC, would need to plead mistaken payment to BNS. But there are legal barriers that make this recourse uncertain, plus, banks would rather cooperate than sue each other, because the same thing can happen in the reverse (i.e. BNS might mistakenly pay RBC tomorrow)

At trial, there were internal memos from in-house counsel of the banks to their superiors. The legal opinions for BNS were grim! So BNS returned the remaining funds + traced funds to RBC.

The bank claimed that BMP suffered no damages, and that BMP was not entitled to proceeds of a fraud. The trial J repeatedly quoted National Slag which said that if the law leads to an absurd result, we must live with it. The bank, of course, did not rely on any chargeback provision, because even if were there, it would be ineffective once the cheques are cleared. UCC is explicit on this point: there is a limit for the chargeback in precise circumstances.

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So the breach of duty of the BNS is proven. Now, are there damages? How can a cloned cheque that appeared out of the blue, with no consideration from BMP lead to damages on the part of BMP? In Stanley Works and National Slag, the issue was insufficient funds of the paying party, so the argument was the same – how can there be a loss to the customer?

From a civilian perspective, there’s simply no damages here, even though there is a breach. From a CmL point of view, there appeared to be a reason for the court to continue its discussion after it found that BMP suffered no loss. So the court reasoned that BMP asked it to complete the fraud. A court cannot help a fraudster.

So, bottom line: a bank may not shift a credit risk on its customer, and BNS is at fault. The banks must agree on the number of days for holdbacks, and inform their customers about it. But in this very strange case, BMP is not entitled to the funds.

National Slag and Stanley Works are not an example of the banks’ practice. If everyone disregarded the rules, the system would never work. So what can RBC do? Sue BNS, or BMP, but this is a long and costly process...

5.0 NEGOTIABLE INSTRUMENTS This course is funnel-like. We started with a very broad picture – now we are moving to a more precise target. Banking

law is composed of layers, like an onion, and those may conflict with each other.

5.1 THE CONCEPT OF NEGOTIABILITY A “bill of exchange” is a paper instrument. This term may be different in other countries, e.g. in UCC they are called

“drafts” or “negotiable instruments” (which can be non-negotiable! E.g. you write ‘non-negotiable’ on a cheque). In the 1990’s there wasn’t much electronic transferring – debit, credit cards. Payments were mostly by paper. Today it’s

70% or less of value of all transactions that come in as paper. BEA is an old legislation with many details. It’s oriented to paper stuff, not electronic transfers.

Canada is said to be very attached to paper instruments. This is because the negotiability feature does not exist in electronic instruments. But maybe, as time passes, this will change.

So what is negotiability? There are 2 attributes: assignment of claim without notice to D & assignment of more R’s than those held by the assignor.

5.1.1.1 Assignment of claim without notice to account debtor You can assign your claim simply by delivering it. This is unusual! Normally you give notice to the debtor when you

assign your claim to a 3rd party. Unless you do that, the claim will be unenforceable. The feature of negotiability is: no notice, nor registration needed. This helps money to circulate. E.g. A gives a cheque to

X. X can sign the same cheque and deliver it to Y. Easy as that.

5.1.1.2 Assignment of more R’s than those held by assignor A big principle in property law, both in CvL and CmL is nemo dat – you can’t assign more rights than you have. A bank,

or a pawn shop can buy a claim for $1200 today and get $1500 tomorrow. But what if the buyer has a claim against the vendor for a faulty product? The vendor’s claim for price then is tainted by this. If the claim is then sold to a 3rd party, who is not aware of the defectiveness, the claim will be sold for more than what is actually worth.

The instruments have the attributes of negotiability unless they are waived. At the ATM, if you deposit a cheque, you may be asked to endorse your cheque “for deposit only.” The only purpose of the cheque would be deposition of funds without further circulation.

In practice, we rarely use cheques for circulation. Mostly, this will be a one-time payment, you don’t often see 20 signatures on the cheque.

5.1.2 Bills of exchange in the world of business There are three important provisions in BEA: definitions of (i) bills, (ii) cheques and (iii) notes Negotiable instruments must be unconditional orders (cheques and bills/drafts) or promises (notes). In cheques and bills,

the drawer orders the drawee to pay another person. Cheques are a species of bills of exchange: namely, the are drawn on banks. Banks have a broad definition in BEA: they include credit unions (caisses populaires) – unlike in Banks Acts. In notes, it’s an unconditional promise of the maker of the note to another person.

So what exactly is a bill of exchange – that is not drawn on a bank? Something called “trade bill” is widely used in the world for the most mundane transactions. Imagine a vendor in Honduras who sells coffee to a purchaser in Canada. Now, a bill of lading (“connaissement”) entitles the purchaser to claim the shipped goods. It’s a “key” to the goods. When the Honduras seller puts the goods on the boat, he issues the bill of lading. Back to our parties. The seller is reluctant to ship

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the coffee without having received payment. So he prepares a bill of exchange, which states something like this: “vendor orders purchaser to pay 1000€ to vendor.” He signs it, but this doesn’t bind the purchaser. So the vendor remits the bill of lading + trade bill to an agent in Canada with the following instructions: remit the bill of lading to the purchaser if, and only if, the purchaser accepts the trade bill. The agent delivers both documents complying with the instructions. The purchaser must sign it – which binds him. This way, the vendor knows he’ll have an entitlement to sue the purchaser for the purchase price. Once the trade bill is signed, we can forget about the sale – the transaction acquires a life of its own. The buyer owes money by virtue of having signed.

Now, in sales, the payment to the vendor is usually not exigible until some delay. But the vendor must pay his coffee cutters and roasters. Where do the needed funds come from if you haven’t received payment yet? Well, with the trade bill in hand, you can go to the bank and ask it to “discount” it: the bank pays the vendor a lesser price now and claims the full value from the purchaser in 30, 60, whatever days. This keeps businesses afloat, and lets entrepreneurs to start a new business.

What if the Canadian purchaser doesn’t pay up? The bank will sue the Canadian buyer, and the buyer will not be able to claim that the coffee beans were defective (negotiable instruments come clean of all this). The buyer will, of course, be able to sue the Honduras vendor later on.

Terminology. “Drawer” is the person who orders payment, drawee is the person who has to pay. “Payee” – straightforward. “Endorser” is the payee who signs the negotiable instrument; “endorsee” is the person down the chain to whom the instrument is delivered. “Holder” (a key concept) is the person in possession of the instrument who has the R to enforce the instrument against the drawer.

Section 129 BEA describes the K that arises in negotiable instruments (a statutorily imposed K). Anyone who puts a signature of a negotiable instrument becomes liable for payment. So when a personal cheque is presented to the bank, the bank will pay it – but if it doesn’t, you will indemnify the holder.

UCC has “cashier’s checks” and “teller’s checks” – no equivalent in Canada. “Banks drafts” are cheques drawn by banks on themselves… and that’s what “cashier’s checks” are, too. “Teller’s checks” are cheques drawn by one bank on another bank. These things receive no formal mention in BEA.

There are negotiable instruments outside of bills, cheques and notes, but we are not concerned with them.

5.2 FORMAL REQUIREMENTS FOR BILLS, CHEQUES OR NOTES There are three types of requirements: formal (i.e. have to do with form): 16, 165, 176 etc. BEA; general K-ual

requirements (47, 49, 52 etc. BEA), and the requirement of delivery (38-39 BEA) A bill is an unconditional order in writing. This is 19th C language: if there is no writing, there is no bill. So no electronic

bills are allowed today. Funny story: one guy carved a huge bill in wood, payable to the government for his taxes. Is this considered writing? Lemieux is not sure if it was accepted or not

16 BEA: (1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.

5.2.1.1 “Unconditional” order “Unconditional.” A condition is an event that is future and uncertain. So “pay the money when Michael Rider scores his

next goal” is not an unconditional order. The scoring-of-the-goal condition destroys the negotiability of the instrument: negotiable instruments are meant to travel among parties and evidence a debt against the drawee. So the fundamental requirement is that there be no conditions attached to it.

A negotiable instrument can have a term, which is a future and certain event. E.g. “pay when George W. Bush ceases to be president.” Or “pay 60 days after [specific date]” Post-dated cheques are valid bills.

A condition can be explicit or implicit. There is a slew of cases on implicit conditions. Consider a consumer K of sale: the consumer is offered a plan of payment, e.g. $30/month for X years starting in month Y. The consumer makes a note, undertaking to pay on the conditions. If all the customers do that, how does the store stay afloat – pays its employees, etc.? The store brings all the promissory notes to the bank and asks it to purchase the notes at discount. The implicit condition is: the note is part of a K which contains other things, such as quality warranty. If a consumer finds a defect, the first instinct is to stop payment. In this case, the consumer will be contacted by the Bank, which will inform him that it’s the “holder in due course..”

So there was a debate sparked (in 1970-80’s) on whether or not there was an unconditional order to pay in such cases. All the conditions stated in the sale K on performance – were they also conditions for the note? Today all the consumer

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legislation has been amended to ensure that no consumer instruments can be assigned without the performance conditions attached to it.

So be aware of implicit conditions, if the instrument refers to another agreement! This will, of course, destroy the negotiability.

So what happens to the merchants who want to sell these customer-payment-agreements to the bank? Just let the bank take security in your assets or accounts receivable and get credit from the bank… The banks won’t take the consumer notes.

5.2.1.2 Order “addressed by one person to another” 16 BEA: an unconditional order must be “addressed from one person to another.” We already saw an instrument where

the drawer is the same as drawee: a “cashier’s check” (U.S.A.) or “bank drafts” (Canada). It’s an order that a bank is giving to itself to pay someone. This instrument has a higher value than a certified cheque. So is a cashier’s cheque a bill of exchange in Canada?

Section 25 BEA: “where the bill drawer and drawee are the same person…” So this possibility is accounted for, thus, section 16 BEA does not prohibit the concept of cashier’s cheques.

5.2.1.3 Signature An instrument must be signed: this is fundamental. Anyone who has signed will be liable; anyone who has not signed will

not be liable. It’s a sine qua non thing. The signature can be your own, or of the person you authorized (4 BEA). You can ask someone to fill out a cheque

payable to your landlord and actually sign “Julia Lifchits” even though the person is not you. This is authorizing an agent to sign your name, recognized by section 4 BEA (of course you must communicate with your bank re: authorized agent).

Think of the cheques issued by the government every day, or by McGill. Does the principal of McGill have to sign 500 cheques every morning? No, we have machines printing and signing cheques. A machine actually prints the authorized signature. Sidenote: you can also authorize someone to sign a receipt of your credit card!

5.2.1.4 Payment “on demand or at a fixed or determinate time” A bill is payable on demand or at a fixed or determinate time. If not, it’s not a bill! 22 BEA: an instrument is payable on demand if it (i) says so explicitly, (ii) says nothing. This is the case with our

personal cheques. It just says “pay to ___” without specifying when. So it’s payable on demand. 23 BEA: payment at a determinate future time. In Canada there is a weird terminology: “payable at sight” or “60 days

after sight” which means payment on demand (i.e. when the drawer sees the note again, the note being presented to him by the payee, or 60 days after that)

A term of the instrument must be certain to happen, e.g. George W. Bush ceasing to be president.

5.2.1.5 A “sum certain in money” A “sum certain in money” is a another key feature of negotiable instruments. Remember than an eventual holder may have absolutely nothing to do with the transaction that gave rise to the bill. All a

bill does is evidence a debt. And this debt must be specific! E.g. one party agrees to pay 10% of the gross annual sales. One would have to wait until the end of the year to ascertain the gross annual sales revenue – before that, the sum is not certain.

The sum that must be certain is both the principal and the interest. Loans create an interesting situation. Consider prime rate interest, for example: a corporation asks for credit and negotiates the interest, which will be prime + negotiated percent interest. The prime rate is a rate of interest that the bank calculates for its own use every so often.

If a borrower writes a note that says “I undertake to pay X dollars with prime rate + Y” there will be an issue of certainty of the sum.

1.1.1.13 Macleod Savings & Credit Union v. Perett (1980, S.C.C. from Alta)Facts Perett signed a an instrument payable to Macleod, which stated “I promise to pay to the order of [Macleod] the

stated principal amount above set forth with interest on the unpaid principal from the date of advance [of the loan]..” Macleod argues that the instrument is a promissory note; even though the interest is unascertained from the face of the instrument. M argues that (i) only the principal must be ascertained, not the interest, and (ii) extrinsic evidence should be used to ascertain interest, as certain other provisions of BEA allow.

Held Instrument is NOT negotiable. Extrinsic evidence cannot be used.Reasons The argument that only principal must be ascertained is contradicted by UK jurisprudence. “The rules of CmL

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of England, including the law merchant apply to the matter of interest since neither s. 28 nor any other provisions of the BEA is expressly inconsistent herewith.”

Second argument fails. It’s true that other provisions of BEA allow extrinsic evidence, but those are exceptions to the rule of certainty (governing all negotiable instruments), without which it is impossible to implement the particular provisions of BEA.

A promissory note payable on demand, it is true, does not give the amount of interest on its face – at the time the note is made. “But .. the exact amount of interest owing can also be calculated at all times, which provides sufficient certainty to insure currency [of the instrument]”

M argues that “a promise to pay $1000 … at such rate of interest as was determined by the maker and the promissee in a separate agreement would be a valid promissory note. Yet, no 3rd party could know, looking at the face of the instrument, [what] the interest payable would be… There is nothing on the face of it to indicate whether the ‘date of advance’ does not antedate the date of the document by several years in which case… the amount of interest payable [could] be commensurate with the principal. [Or] .. it is not inconceivable that the ‘date of advance’ might be subsequent to the date of the document; the amount of interest payable might then be a negligible fraction of the principal.”

(Australian J cited) “‘Certainty’ is a great object in commercial instruments; and unless they carry their own validity on the face of them they are not negotiable”

Obiter Another case dealt with an instrument where the maker “was accorded the privilege of making payments on account of principal from time to time.” This does not create an uncertainty in amount, but rather in contingency of the promise. “In so far as a holder in due course is concerned, the full amount is payable less the amount of such prepayments as may have been acknowledged in writing on the instrument. … The amount of interest can be calculated at all times on the basis of the full amount of the principal or of what remains of it on the face of the document.”

The owner of the Perett company undertakes to guarantee the loan obtained for the enterprise. So there is (i) a guarantee agreement, and (ii) a promissory note evidencing the loan of $16,000. The interest was to start accumulating from the date of advance.

The guarantee agreement was for some reason found invalid. There were probably certain requirements unfulfilled (refer to statutes in Alberta). The Macleod Bank sues on the guarantee (which fails) and on the basis of the note.

Sidenote: why did the parties go to S.C.C. over $16K? That’s because Macleod lost and had to pay the bank’s lawyer fees. Apparently the lawyer for Perett was a professor, probably working pro bono for him, because she found the case to be so interesting!

S.C.C. concludes that the instrument is deficient – it is not for a sum certain. Negotiable instruments are meant to change hands, and need to be certain. The reason we are looking at Macleod is to stress what the certainty of an instrument means. Section 16 BEA has a list of requirements: (i) writing, (ii) made to a person, (iii) for a certain sum, (iv) at determinate time.

Why certainty in bills of exchange? They are meant to circulate. They may not always be used this way, but they still need to be “liquid.” How is an instrument supposed to pass many hands if the sum promised is unclear?

Even BEA provides situations where some instruments do not have certainty on their face, but are recognized as bills of exchange. E.g. 23(b) BEA (cited as 24 BEA, but this was before re-numbering of BEA). Imagine an instrument that says “pay to the order of X when George W. Bush dies + interest from the time of the order at the rate of 5%” The interest amount is unclear: if George W dies in 25 years, it will be big, if he dies in 6 mos., it will be small. Yet it’s a bill of exchange.

If the piece of paper signed by Perett is not a bill of exchange, Perett is not liable. The instrument of Perett does not say when the interest starts to run exactly – it just says “from the date of advance.” Look

at pages 228-229 of Volume II. Court: “who would gamble on such an instrument?” “How can such a document have any currency?”

5.2.1.6 Payable to a “specified person” or “bearer” “Bearer” is any person who gets his hands on the instrument, just like with money. It’s as negotiable as an instrument can

be. Why would anyone issue an instrument payable to “bearer”? Lemieux can’t think of any reasons. It’s very useful for money laundering All you need to do is deliver the instrument to the bearer. In contrast, an instrument payable to a specific person needs an endorsement – i.e. the signature of the payee, in addition to delivery. It’s a very important distinction.

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o Interesting sidenote from Joydeep: in India, it’s very hard to deposit cheques – the red tape would take hours. So businessmen will send boys with cheques payable to bearers who will deposit them in banks. Lemieux: there must be a lot of trust in those boys!

o In the U.S.A., some companies make cheques payable to “cash” for the purposes of petty cash. The intent of the issuer is interpreted as “payable to bearer.”

o James Bond would have bearer instruments in his pockets, instead of carrying wads of money bills! When he leaves London, he doesn’t know whom he’ll pay (for hotels, casinos, guns, cars, women )

Otherwise, if the payee is not bearer, how specific should the payee be? First name, last name? An office title is acceptable – e.g. you pay taxes to a “receiver general.” A parking ticket is payable to the “City of Montréal.” Even “dean of McGill law school” should be specific enough (there this only one, Nicholas Kasirer). 18(3) BEA: “A bill may be made payable to the holder of an office for the time being.”

20(4) BEA: there must be “reasonable certainty” of the name. E.g. a cheque payable to “Gazmetro” may be specific enough without specifying the exact name (“Gazmetro LLP”) unless there are other companies with resembling names (“Gazmetro Inc.”) There are no specific guidelines on this in Canada. We’ll see this situation in Bank of Nova Scotia v. TD Bank. There, “Imperial Sales” could be confused with “Imperial Equipment Sales” – two different companies.

In the U.S.A., there is a terrific solution – 3-110 UCC. Whatever the intent of the signing person is, that’s the payee. Whether or not this intent was captured properly or not doesn’t matter.

Section 20(5) BEA – the most complicated provision in the whole Act. Boma Manufacturing – talks about fictitious and non-existing payees. We’ll come back to this case and topic later.

Singing “for deposit only” excludes paying to a bearer.

5.2.2 The BEA provisions 16 BEA (1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the

person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer. (2) An instrument that does not comply with the requirements of subsection 1, or that orders any act to be done in addition to the payment of money, is not, except as hereinafter provided, a bill. (3) An order to pay out of a particular fund is not unconditional within the meaning of this section, except that an unqualified order to pay, coupled with

o (a) an indication of a particular fund out of which the drawee is to reimburse himself or a particular account to be debited with the amount, or

o (b) a statement of the transaction that gives rise to the bill, is unconditional.

165 BEA (1) A cheque is a bill drawn on a bank, payable on demand. (2) Except as otherwise provided in this Part, the provisions of this Act applicable to a bill payable on demand apply to a cheque. (3) Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.

176 BEA (1) A promissory note is an unconditional promise in writing made by one person to another person, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer. (2) An instrument in the form of a note payable to the maker’s order is not a note within the meaning of this section, unless it is endorsed by the maker. (3) A note is not invalid by reason only that it contains also a pledge of collateral security with authority to sell or dispose thereof.

3-104 UCC (a)  Except as provided in subsections (c) and (d), "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:

o (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;o (2) is payable on demand or at a definite time; ando (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act

in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

(b)  "Instrument" means a negotiable instrument. (c)  An order that meets all of the requirements of subsection (a), except paragraph (1), and otherwise falls within the

definition of "check" in subsection (f) is a negotiable instrument and a check.

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(d)  A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this Article.

(e)  An instrument is a "note" if it is a promise and is a "draft" if it is an order.  If an instrument falls within the definition of both "note" and "draft," a person entitled to enforce the instrument may treat it as either.

(f)  "Check" means (i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier's check or teller's check.  An instrument may be a check even though it is described on its face by another term, such as "money order."

(g)  "Cashier's check" means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank.

(h)  "Teller's check" means a draft drawn by a bank (i) on another bank, or (ii) payable at or through a bank. (i)  "Traveler's check" means an instrument that (i) is payable on demand, (ii) is drawn on or payable at or through a bank,

(iii) is designated by the term "traveler's check" or by a substantially similar term, and (iv) requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the instrument.

(j)  "Certificate of deposit" means an instrument containing an acknowledgment by a bank that a sum of money has been received by the bank and a promise by the bank to repay the sum of money.  A certificate of deposit is a note of the bank.

4 BEA Where, by this Act, any instrument or writing is required to be signed by any person, it is not necessary that he should sign it with his own hand, but it is sufficient if his signature is written thereon by some other person by or under his authority.

50 BEA A signature by procuration operates as notice that the agent has but a limited authority to sign, and the principal is bound by such signature only if the agent in so signing was acting within the actual limits of his authority.

51 BEA (1) Where a person signs a bill as drawer, endorser or acceptor and adds words to his signature indicating that he has signed for or on behalf of a principal, or in a representative character, he is not personally liable thereon, but the mere addition to his signature of words describing him as an agent, or as filling a representative character, does not exempt him from personal liability. (2) In determining whether a signature on a bill is that of the principal or that of the agent by whose hand it is written, the construction most favourable to the validity of the instrument shall be adopted.

22 BEA (1) A bill is payable on demand: (a) that is expressed to be payable on demand or on presentation; or (b) in which no time for payment is expressed. (2) Where a bill is accepted or endorsed when it is overdue, it shall, with respect to the acceptor who so accepts it, or any endorser who so endorses it, be deemed a bill payable on demand.

23 BEA A bill is payable at a determinable future time, within the meaning of this Act, that is expressed to be payable (a) at sight or at a fixed period after date or sight; or (b) on or at a fixed period after the occurrence of a specified event that is certain to happen, though the time of happening is uncertain.

27 BEA (1) The sum payable by a bill is a sum certain within the meaning of this Act, although it is required to be paid: (a) with interest; (b) by stated instalments; (c) by stated instalments, with a provision that on default in payment of any instalment the whole shall become due; or (d) according to an indicated rate of exchange or a rate of exchange to be ascertained as directed by the bill. (2) Where the sum payable by a bill is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the amount payable. (3) Where a bill is expressed to be payable with interest, unless the instrument otherwise provides, interest runs from the date of the bill and, if the bill is undated, from the issue thereof.

20 BEA (1) When a bill contains words prohibiting transfer, or indicating an intention that it should not be transferable, it is valid as between the parties thereto, but it is not negotiable. (2) A negotiable bill may be payable either to order or to bearer. (3) A bill is payable to bearer that is expressed to be so payable, or on which the only or last endorsement is an endorsement in blank. (4) Where a bill is not payable to bearer, the payee must be named or otherwise indicated therein with reasonable certainty. (5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer.

21 BEA (1) A bill is payable to order that is expressed to be so payable, or that is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it should not be transferable. (2) Where a bill, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.

5.3 THE REQUIREMENT OF DELIVERY 38 BEA Every contract on a bill, whether it is the drawer’s, the acceptor’s or an endorser’s, is incomplete and revocable

until delivery of the instrument in order to give effect thereto, but where an acceptance is written on a bill and the drawee

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gives notice to, or according to the directions of, the person entitled to the bill that he has accepted it, the acceptance then becomes complete and irrevocable.

39 BEA (1) as btw immediate parties and as regards a remote party, other than a holder in due course, the delivery of a billo (a) in order to be effectual must be made either by or under the authority of the party drawing, accepting or

endorsing, as the case may be; oro (b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring

the property in the bill. (2) Where the bill is in the hands of a holder in due course, a valid delivery of the bill by all parties prior to him, so as to

make them liable to him, is conclusively [ irrebuttably ] presumed . 40 BEA Where a bill is no longer in the possession of a party who has signed it as drawer, acceptor or endorser, a valid

and unconditional delivery by him is presumed until the contrary is proved.

“Contract on a bill” means the liability of anyone who puts his signature on a bill. 129 BEA lists the liabilities. 38 BEA says that there is no liability unless there is physical delivery.

39 and 40 BEA talk about two presumptions of delivery. 39 BEA: “conclusive” presumption (“presomption irrefragable”). A valid delivery is “conclusively” presumed when the bill is in the hands of a holder in due course – it’s not rebuttable. 40 BEA is the opposite: valid delivery is presumed until the contrary is proven.

1.1.1.14 National Bank of Canada v. Tardivel Associates (1994, Ontario C.A.)Facts Tardivel persuaded one Nick DiDonato (“D”) to perform a “quick flip of real estate” (D invests and gets a higher

sum within 4 weeks). D issued a cheque to Tardivel, but required supporting documents; when such documents were not forthcoming, D refused to go through with the transactions. But Tardivel simply took the cheque while D was not looking and deposited it into his bank, NBC. An NBC employee honoured the cheque by calling up D’s bank, before the official clearing. Tardivel quickly wired the money to a 3rd party. When D issued a stop order, there was already a $19K deficiency – and Tardivel was insolvent and in jail. The NBC is sued, and the bank claims that delivery of the bill from D to Tardivel must be presumed (39.2 and 40 BEA)

Held There was no delivery (it was theft) – so there was no billReasons 39(2) BEA states: “where the bill is in the hands of a holder in due course, a valid delivery of the bill by all

parties prior to him, so as to make them liable to him, is conclusively presumed.” The bank argues that it’s the holder in due course (165(3) BEA) and is protected by the provision.

“Since there was no first delivery (the cheque was stolen), there was never a bill or note, therefore s. 39 does not apply. The bank never became a holder in due course.”

40 BEA states: “where a bill is no longer in possession of a party who has signed it as drawer, acceptor or endorser, a valid and unconditional delivery by him is presumed until the contrary is proved.

“Indeed, the contrary has been proved here. The bill was stolen.”

Remember that banks are not obliged to make funds deposited by their customers available to them right away. Banks usually release the funds immediately to preferred (trusted) clients, and freeze the account for new or other customers. Here, the bank gave Tardivel a provisional credit right away.

If the cheque turns out to be bad, the bank has the right to debit the amount to its customer. It doesn’t bear the loss. D countermanded the cheque, depriving his bank, CIBC of the authority to pay it. So the cheque is returned, and NBC

tries to debit Tardivel, but there are no funds available there. So NBC sued Tardivel’s company and the company from which the cheque is stolen (D’s company).

So, what is a “holder in due course” ? Or “holder”? See below. 38 BEA et seq. makes delivery one of the conditions for becoming a holder. This comes from the 19th C commercial

practice, which emphasized possession. 39 BEA: delivery is presumed when a bill is in the hands of a holder in due course.

Why is the bank a holder in due course? The bank’s lobbyists caused the BEA to be amended to include a special rule in respect to cheques: 165(3) BEA: “Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.” Otherwise, how can the bank be a holder? It’s not a payee, nor an endorsee, nor has it given value – it doesn’t even logically qualify for “holder”!

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So the bank is claiming from the company from whom the cheque is stolen! Argument : because delivery from D to Tardivel is “conclusively presumed.” This means you can’t fight against the presumption. The court finds it inequitable that the bank can recover from a company form which the cheque was stolen. Lemieux: yes, it’s inequitable… but it’s the law! Just like Slag, one can say that if the law leads us to an absurd result, so be it.

The J in Tardivel likes equity though. Lemieux: if all JJ decided cases on the basis of what seems right to them, there would be no need for laws. The court in this case simply deprived the NBC of the benefit of section 39(2) BEA.

JJ are human beings with empathy, which makes sense in justice. But if you think it’s unjust to require a victim of theft to pay the NBC, you can either do what the court did, or you can play around with 165(3) BEA. Can you interpret this section in such a way as to deprive the bank of the status of holder in due course? Think about this when you read BOMA Manufacturing. Me: in BOMA, the 165(3) BEA defence is denied in the context of fictitious/non-existing payees, because a deposit by a “valid payee/endorsee” was needed for this defence to work. The rogue in that case deposited cheques payable to someone else. It’s a matter of policy: a rogue will have a much harder time defrauding a company by signing a cheque payable to him or her (rather than to someone else). But in this present case, the cheque is payable to Tardivel! I think that if we extend the BOMA logic even further, 165(3) BEA may lose any usefulness? THINK ABOUT THIS

CRAWFORD (777): “the court had obvious difficulty with the point, noting that there was ‘an apparent conflict’ between the two presumptions [in sections 39(2) and 40]. It chose to subordinate eth rights of the holder in due course to those of the drawer, in accordance with its perception of the ‘dictates of equity and common sense.’ … The case ought not to be followed. The rebuttable presumption of section 40 does not apply when the instrument is in the hands of ha holder in due course.”

Me: bottom line: valid delivery is necessary as between parties; it can be presumed in case of a holder in due course, but the consideration of equity here prevails over law.

5.4 THE LIABILITY OF PARTIES TO HOLDERS

5.4.1 Holder: section 2 BEA The notion of “holder” is central in BEA, because the holder is the recipient of the K on the bill, and is entitled to sue on

it. 129 BEA : should the bank fail to pay your cheque, you will indemnify the holder.

129 BEA The drawer of a bill, by drawing it: (a) engages that on due presentment it shall be accepted and paid according to its tenor, and that if it is dishonoured he will compensate the holder or any endorser who is compelled to pay it, if the requisite proceedings on dishonour are duly taken; and (b) is precluded from denying to a holder in due course the existence of the payee and his then capacity to endorse.

73 BEA The rights and powers of the holder of a bill are as follows: (a) he may sue on the bill in his own name; (b) where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill; (c) where his title is defective, if he negotiates the bill to a holder in due course, that holder obtains a good and complete title to the bill; and (d) where his title is defective, if he obtains payment of the bill, the person who pays him in due course gets a valid discharge for the bill.

The endorser has a similar K (132 BEA: almost identical obligations as drawer). If you make a cheque payable to your landlord, S, and then S gives the cheque to his wife by endorsing it, then S is liable in the same way as a drawer is.

Except where an instrument is payable to a bearer, the instrument must be endorsed to be transferred (see 59 BEA). Typically, when assigning rights (under a K), you have to give notice to the debtor, and sometimes register the assignment, too. But in negotiable instruments, there are no such requirements.

A 3rd person can also put his signature on the bill. The “acceptor” (128 BEA) is a drawee who accepts liability on the instrument. When you order your bank to pay through a cheque, the bank has no personal liability to pay – until and unless it signs (“certifies”) the cheque. The bank will accept liability for payment by certifying it.

There can also be an “accommodation party” and “anomalous endorser.” An accommodation party lends his name without having received any value; an anomalous endorser puts his signature on the back of the instrument… for no apparent reason… forget these historical curiosities

The holder under 73(a) BEA can sue on the bill. If the instrument is payable to bearer, any person in possession is a holder; if the instrument is payable to a specific person, the holder is either that person (payee) or any endorsee who is in possession of the instrument.

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The name of the endorsee need not be put on the instrument. See 62 BEA: a simple signature of the payee suffices for endorsement. But the signature must be on the instrument – not on any outside document, not on the photocopy of the instrument.

Also, there can not be partial endorsement. You can’t write “pay half of this to X” on an instrument (60 BEA et seq.) A signature on the instrument suffices, but you can add language to it. The endorser can deprive the instrument of its

negotiability – but writing “pay to X only.” The endorser can also write “for deposit only at my account,” which means the cheque will not circulate anymore. It’s a restrictive endorsement. So a dishonest bank employee who grabbed the cheque could forge your signature on the cheque and try to negotiate the cheque to someone else.

Simply signing the cheque (“endorsement in blank”), the instrument becomes payable to bearer (66 BEA). So keep this in mind. While few people actually make an instrument payable to bearer, this form of endorsement makes the personal cheque presumptively payable to bearer. Any person who comes into possession of it becomes a holder.

So if S endorses the cheque and gives it to his wife, the wife can pass it on to her daughter without signing it. Once endorsed, the cheque is completely negotiable like money.

5.4.2 Holder for value 53, 54, 57(1) BEA A holder for value is simply a holder who gave value to become in possession of the instrument. E.g. S provided you the

apartment, and you give S the cheque. S is the holder for value. There is not a lot in BEA that has to do specifically with holders for value. There is, on the other hand, a provision for

“accommodation parties” – people who endorse cheques without receiving any consideration for it.

5.4.3 Holder in due course 55 BEA. (1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the

following conditions, namely, (a) that he became the holder of it before it was overdue and without notice that it had been previously dishonoured, if such was the fact; and (b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

(2) In particular, the title of a person who negotiates a bill is defective within the meaning of this Act when he obtained the bill, or the acceptance thereof, by fraud, duress or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.

This is a bit trickier. 55 BEA: it’s a holder for value who has no notice of any defect with respect to the instrument. E.g. you give a cheque to S. S deposits it in his bank account, and you remand the payment. S ends up with an unpaid

cheque. S delivers the dishonoured cheque to his wife. The wife should have notice that this instrument was not paid, because the words “remanded” are written all over the instrument. She’s not a holder in due course.

Another example: your leased apartment is a disaster, everything in it is wrong. But you prepaid your lease one month in advance. The wife of your landlord S was well aware of the disastrous conditions of the apartment. You have a personal claim against S for reduction of the rent. The wife knows this, too. If S gives your cheque to his wife via endorsement, the wife could not claim the status of holder in due course, because she had notice of a personal claim against S.

Or, if there is a large stamp saying “PAID” on the cheque, the holder cannot be a holder in due course – there is notice that the cheque is no longer valid. Or if the cheque bears no signature.

“…Before it was overdue” – a person who foolishly buys an instrument after it was due is not a holder in due course. The holder in due course has a fuller arsenal of benefits. Simple holder has a lesser arsenal. 73(b) BEA feature - where he

is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill.

If the wife were unaware of the conditions of the apartment, she would take the bill free from any defects. So if she took action against you on the instrument, you would be unable to raise as a personal defence the fact that the consideration for the cheque was deficient (the apartment was crap).

Another attribute: 73(c) BEA: “where his title is defective, if he negotiates the bill to a holder in due course, that holder obtains a good and complete title to the bill.” If someone were to steal the cheque from S (after S has endorsed it) and transferred it to Y, who is in GF and has given value, then Y would be a holder in due course.

“Stupid but honest rule” (3 BEA): “A thing is deemed to be done in good faith, within the meaning of this Act, where it is in fact done honestly, whether it is done negligently or not”. GF is typically measured against the knowledge of the person as to the defects of the instrument (knowing of some mistake, controversy, etc.). It’s a question of degree and appreciation of a potential problem.

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o E.g. in a situation where an instrument is discounted at a financial institution – a roofing/ renovation company would propose renovation work to homeowners, sign K’s and take those K’s to its bank. But in certain K’s, the renovators did a poor job (they received complaint letters from the homeowners who refused to pay in full). If any of that information comes to the attention of the bank, the bank may not be a holder in due course – it received some notice of the problem.

Where does BF begin? A reasonable suspicion that there may be personal defences/defects in the bill. Think of BMP Global – the circumstances of receiving the cheque were quite fishy, giving rise to the duty to inquire.

Interesting feature in 57(2) BEA : a presumption that where there is a holder of a bill, it’s a holder in due course. It’s a rebuttable presumption.

1.1.1.15 Williams and Glyn’s Bank v. Belkin Packaging (1982, S.C.C. from BC)Facts Belkin wanted to buy a machine from Millspaugh Ltd (“M”), for £713K with instalment payments on promissory

notes. M needed an advance to manufacture the machine, so it wanted to discount the notes at Williams & Glyn Bank (“Bank”). Belkin, M and Bank negotiated the payment arrangements for ten months, all parties having opposing interests: Belkin did not want to pay anything until he received a working machine, the Bank wanted an assurance of payment, and M needed the advance capital. So all parties settled on terms that: when the notes are issued to M (and discounted to Bank as immature notes), the Bank will hold them till maturity without selling or assigning them, and also promise that “if and so often as the deferred payments under the [purchase K btw M and Belkin] are revised …, we will exchange the Notes … for new notes draw by Belkin Packaging and payable to M in the amounts representing the deferred payments properly payable under the [K]” The first note having matured, Belkin defaulted in payment, but informed the Bank 1 day earlier that the old notes were to be exchanged for the new ones. The Bank agreed to exchange on the condition that the first note be paid, which Belkin found unacceptable, and the parties went to court. The reason behind the issuance of new notes was a delay in commencement of manufacturing of the machine.

Held The Bank was NOT a holder in due course of the notesReasons 55 BEA: a holder in due course “took the bill in GF and for value, and… had no notice of any defect in the title

of the person who negotiated it.” 73 BEA: a holder in due course takes the bill “free from any defect of title of prior parties, as well as from mere

personal defences available to prior parties among themselves” “It is not disputed that the Bank took the notes ‘in GF and for value’ … [Also,] as the Bank was at least the co-

author of the scheme for the issuance and negotiation of these notes, it is clear… that the Bank had notice of all these arrangements.” The only question is: are there defects of title?

“Defect of title” (AKA “equities attaching to bill”) “differs from a mere personal defence in that it relates to the instrument and affects title to it.” “A mere personal defence …may be good as btw the 2 parties btw whom it arises, that is, btw immediate parties, but it is not available as against a remote party.”

In a similar case (Standard Bank of Canada v. Wettlaufer, 1915) a bank was held to be NOT a holder in due course because the bank had “distinct understanding that there was to be no liability unless there was an indebtedness from the Δ’s at maturity of the bill. The bank was, therefore, in no better position than the [vendor]”

“I find that the amply evident intent of the Bank and its associates, Belkin and [M], in this financing venture, was to create a note which would, in the last analysis, allow Belkin to replace it so many times as necessary so that the final note would mature on the expiry of one of the periods specified in the K. … The scheme was a ‘defect’ within the meaning of s. 56 in that it was centered upon the negotiability of the note.”

The Bank’s rights as a mere holder (whether the deferred payments can be revised and notes exchanged) are matters for the arbitration between the parties, as agreed in their K. “The question as to the extent to which a holder for value [cf. in due course] is subject to K-ual defences available in an action as btw the parties to promissory notes, is not before the Court.”

There is reference in this case to ECGD (“export credit guarantee department”) – an agency in UK (there’s one in every country), whose purpose is to promote and facilitate export from the country (sale of goods and services by local parties). Typically, it guarantees the notes in case of insolvency or political risk. Because of these guys, the notes had to be negotiable and structured particularly.

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If, at the time of discount, the bank knew of any dispute btw M and Belkin; if this was communicated to it by M or Belkin, the bank would have taken the note with a notice of a defect. What is the crux of the case?

Holders in due course have immunity to certain defences: defects in title + personal defences. This makes the holder in due course in a better position than the person who had the right to enforce the notes (e.g. M)

Defects in title are different. 55(2) BEA provides a few examples: the bill is obtained by fraud, duress, force and fear, or for an illegal consideration. So why differentiate btw defects in title & personal defences? No reason – just historical peculiarities. Knowledge of either personal defence or defect in title will make a holder NOT in due course. Conversely, if a party is a holder in due course, it’s immune to both personal defence and defect of title.

There is a 3rd category, by the way, called “absolute defences” – all other defences that are not personal defences nor defects in title. These defences can be set up against holders in due course, unless there is an exception in BEA.

The type of defence in Belkin is quite rare. A note cannot say “I will pay when the machine is delivered” – because it wouldn’t be a determinable time. So the parties arbitrarily chose dates on which the money would be payable, knowing that the these “target dates” would be reviewable. The agreement btw M and Belkin provided for renewal of notes. ECGD required the notes to be negotiable, because he wants to have the ability to sue [Belkin] on the notes.

Sidenote: remember that everybody who signs a note undertakes liability. When M discounted the notes at the bank, it signed them, guaranteeing that the notes will be paid. Of course, M has the right to sue Belkin. And of course, the bank can sue M if it doesn’t get the full amount (since it’s not a holder in due course) from Belkin. Everybody can sue everybody, as long as the signature is there.

Example of a bill of exchange (handout): it’s a simple order to pay, “at sight” (which means “on demand” – when the drawer sees it again). Here, there are no conditions attached to the order. The payee (“le preneur”) is the XYZ Company.Why “pay to the order of” instead of just “pay to”? It’s a historical element: it signifies that the payee will be able to pass on the instrument to someone else.Bottom right corner: signature.There are no restrictions as to the form of the instrument. The size of the document doesn’t matter, it need not have a date.The vendor, XYZ has just purchased goods for $20K from LA Time Factor vendor on that bill of exchange. In and of itself, it’s just an evidence of LA Time’s undertaking to pay XYZ. It’s not cashable in a bank.

Example of a bank draft. The scratched out part is “Bank of Nova Scotia.” It’s an order from BNS to pay Deutsche Bank in Germany, to the order of someone. The currency is euros. This is useful. Today, people usually just wire the funds to their new account opened in a German bank. But the older generation will request a bank draft.Banks have partners, since no bank has a branch everywhere in the world. So the BNS, for example, has an agreement with the Deutsche Bank. BNS has an account at the Deutsche Bank with holds some funds – from which the customer of BNS will get his money, when he presents the bank draft to the Deutsche Bank.Sometimes bank drafts can be an order from a bank to pay itself. Why? Sometimes people want cash for transactions, e.g. to buy rare objects. So the buyer will take a bank draft, which is considered to be an equivalent to cash.

5.4.4 Real (“Absolute”) Defences to Holders in Due Course Note: holders in due course = détenteur régulier (fr.) Absolute defences are: forged signatures (48 BEA), material alterations (144 BEA, e.g. adding an extra zero to the sum

appearing on the cheque), bankruptcy, discharge (payment) of the bill, and as we see in Wells Fargo, stolen identity Tardivel: the cheque is outright stolen from the person who had signed it. The defence against the holder in due course

is…well, that the cheque was stolen! But: 39(2) BEA : in the hands of a holder in due course, delivery is “conclusively” presumed. It’s an exception to the absolute defence of absence of delivery.

o So there are exceptions even to the absolute defences to holders in due course.o Another example is exception to 144 BEA (material alteration) – a holder in due course can enforce the

instrument on the amount that appeared before the alteration.

1.1.1.16 9138-7746 Québec v. Société Financière Wells Fargo (2007, Cour du Québec)Facts A rogue stole identity of a resident of New Brunswick, and obtained a loan from Wells Fargo. Fargo issued the

rogue a cheque for $4K, believing the rogue to have the claimed identity. Rogue discounted the cheque at 9138-7746 (“Québec”) for $3,915. Québec’s bank then learned of the forgery and debited Québec, returning the cheque.

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Québec asserts that it’s a holder in due course, and the defence of forged signature is not available to Fargo since it’s a case of stolen identity.

Held Stolen identity defeats a bill – Québec has no recourseReasons Usurping identity gives no legitimacy to a bill. The signature endorsing the bill is also fraudulent. A fraudulent

endorsement is a valid defence, opposable to Québec

Escompte (discount): réduction du montant d'une dette accordée au débiteur qui la paye au comptant ou avant l'échéance. « [...] l'acceptation d'un paiement anticipé diminué de l'escompte est laissé à l'agrément du vendeur, toujours libre d'exiger de l'acheteur la totalité du prix » Occurs in art. 2440 C.c.Q.; art. 1149 C.c.L.C.; art. 70(g), 72(b) CPA

5.5 CERTIFIED CHEQUES

5.5.1 Certification and the C.c.Q. Certified cheques are very important in deal closings (unless the sum is more than $25m – wire transfers required).

Buying houses requires certified cheques. Settlement of lawsuits by litigators – certified cheques are used. In commerce, certified cheques are the equivalents of cash.

1564 C.c.Q. : added in the 1990’s. “Where the debt consists of a sum of money, the debtor is released by paying the nominal amount due in money which is legal tender at the time of payment. (2) He is also released by remitting the amount due by money order, by cheque made to the order of the creditor and certified by a financial institution carrying on business in Québec, or by any other instrument of payment offering the same guarantees to the creditor, or, if the creditor is in a position to accept it, by means of a credit card or a transfer of funds to an account of the creditor in a financial institution.”

Lemieux calls 1564 C.c.Q. a “jewel.” UCC touches on the same subject in art. 3-310. The first part of 1564 C.c.Q. is rather universal (about the legal tender). The second one is a progressive provision. Money orders are not common means of payment anymore. The provision treats money orders, certified cheques, credit card transfer and wire transfers as equivalent to cash.

What are the “guarantees” in 1564 C.c.Q.? Those are guarantees of free an immediate access to cash. “If the creditor is in a position to accept it” – some methods of payment require certain banking devices. The method of

payment is just as vital in a commercial K as any other clause. A creditor could always insist on payment of cash, not accepting any other payment. Well, 1564 C.c.Q. changes that. Cr’s now are forced to accept some other means of payment listed in the article.

Retailers have an interest in accepting a variety of payment methods – to attract greater clientele (except for stupid Tim Hortons™) No one accepts personal cheques anymore, however. This is because such a cheque is always revocable, and may have insufficient funds.

Let’s consider certified cheques, mentioned in the article, in detail. First, the certification must be done by a Québec financial institution. Lemieux: what’s wrong with other banks outside of our jurisdiction? Credit unions (different from banks, but similar, account holders are “owners” of these institutions) existing in the western provinces have no presence in Québec, for example. Why wouldn’t a cheque, certified by an Albertan credit union, be unacceptable? Second, cheques must be payable to the Cr’s order – that means you cannot endorse a cheque payable to you and pass it on to the store, using the inherent negotiability of the cheque. Lemieux: why not??

5.5.2 Certification and the BEA There is a commercial understanding that certified cheques have a special status – similar to cash – and are above other

methods of payment. But you will not find any reference to certified cheques in BEA! Maybe because BEA came from UK legislation? In the UK, there is no notion of certified cheques. Whatever the reason,

there is not a single mention of certification in this law. Given the special status of certified cheques, this creates problems.

Bank of Nova Scotia v. Canada Trust (summary below): part of the debate in this case is about what certification is. First, who can have the cheque certified? You can do it either in the position of payer, or also of payee (you go to the drawee bank and get it certified). The banks immediately debit the drawer and put the money in the “suspense account.” This is because the banks become personally responsible for payment, of course.

Why would the payee want to certify the payer’s cheque? In a closing, people get insecure. So what do the banks do, exactly? First, they verify the presence of sufficient funds. Second, they get the specimen card

with the drawer’s signature and check it against the signature on the cheque. Then, they put protective mechanisms on the

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cheques: a hole is put in the magnetically encoded line of characters at the bottom of a cheque (bearing bank account No., branch No.) so that it can’t be read by a computer (because a bank immediately debits its customer’s account, and doesn’t want to do this again, if the cheque inadvertently goes through the clearing system again); a stamp is put on a cheque without a signature (but the practice varies). BNS v. Canada Trust establishes the uniform requirement for certified cheques. The argument of BNS is really bizarre – after years of commercial practice treating cheques as cash, BNS argues that its stamped certified cheque is not one, because there is no signature. BNS was invoking an analogy with “acceptance” which requires a signature. Lemieux: it’s a shame that BEA does not have any provisions on certified cheques, because they play a huge role in the commercial world.

CPA rule A4 section 4(b): reference to certified cheques – these cheques are cleared in the normal manner (VERIFY THAT). These cheques are defined in a broad manner, to account for different practices. In the normal course of events, the payer bank may refuse to pay on a cheque, and return it to the payee bank – but not with certified cheques, the only grounds for return is material alteration of forged signature. The bank cannot return the cheques for any other reason: e.g. if it were mistaken about the sufficiency of its customer’s funds.

Rule A4 sec. 4(b) CPA: a drawee may not return an item that it certified before the item was exchanged for the purpose of clearing and settlement, unless the item is returned for the reason “forged endorsement,” or for the reason that the item has been materially altered subsequent to certification.

34 BEA (1) The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. (2) Where in a bill the drawee is wrongly designated or his name is misspelled, he may accept the bill as therein described, adding, if he thinks fit, his proper signature or he may accept by his proper signature.

35 BEA (1) An acceptance is invalid unless it complies with the following conditions: (a) it must be written on the bill and be signed by the drawee; and (b) it must not express that the drawee will perform his promise by any other means than the payment of money. (2) The mere signature of the drawee written on the bill without additional words is a sufficient acceptance.

36 BEA (1) A bill may be accepted (a) before it has been signed by the drawer or while otherwise incomplete; or (b) when it is overdue or after it has been dishonoured by a previous refusal to accept, or by non-payment. (2) When a bill payable at sight or after sight is dishonoured by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of first presentment to the drawee for acceptance.

128 BEA: The acceptor of a bill by accepting it is precluded from denying to a holder in due course: (a) the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the bill; (b) in the case of a bill payable to drawer’s order, the then capacity of the drawer to endorse, but not the genuineness or validity of his endorsement; or (c) in the case of a bill payable to the order of a third person, the existence of the payee and his then capacity to endorse, but not the genuineness or validity of his endorsement.

130 BEA: No person is liable as drawer, endorser or acceptor of a bill who has not signed it as such, but when a person signs a bill otherwise than as a drawer or acceptor, he thereby incurs the liabilities of an endorser to a holder in due course and is subject to all the provisions of this Act respecting endorsers.

1.1.1.17 Bank of Nova Scotia v. Canada Trust (1998 Ontario finst)Facts A client asked his bank, BNS, to certify a cheque payable to Canada Trust. The BNS employees noticed that the

client’s account had insufficient funds, but still agreed to certify the cheque by affixing an official certification stamp, a seal bearing BNS name, and recording the amount of the cheque with a protectograph. Later on, however, when the cheque came to BNS for clearing, BNS refused to pay, invoking insufficient funds in the client’s account. Canada Trust demand payment (after obtaining favourable jgmt from the CPA panel). BNS asserts that it did not certify the cheque, because no bank official put his signature on it – relying on 35 BEA, which deals with acceptance.

Held Certification (not codified in BEA) is equivalent to acceptance in terms of its consequences, but differs in terms of formal requirements. No signature is necessary for certification. BNS must pay up.

Reasons 35 BEA “is not intended to apply to certified cheques.” In Maubach v BNS, C.A. of Ontario decided that certification produces the same effects as acceptance, but does not decide whether a signature is necessary for valid certification.

Scholar Benjamin Geva: “certification is demonstrated by some physical marking on the cheque, normally stamping on its face the word ‘certified’”

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“It must be kept in mind that while the legal effect of certification and acceptance may be viewed as ‘equivalent,’ it remains that the formal requirements for each (certification and acceptance) are not necessarily the same.”

Comment UCC codifies certification; UK does not recognize certification

1.1.1.18 A.E. LePage Investments v. Rattray Publications (1994, Ontario C.A.)Facts LePage (“LP”) is the real estate broker acting between Rattray (“R”) and a commercial landlord. R wanted to lease

space from the landlord, and handed LP a cheque (to be deposited into LP’s trust account) for a deposit. R then changed its mind and issued a stop payment to CIBC. One day later, LP asked R’s bank, CIBC, to certify the cheque. CIBC (dumb) employee overlooked a notice on her computer that the cheque was remanded, and certified the cheque. CIBC then refused to honour the cheque. The CIBC argues that it’s not obliged to keep the certification when a payee requested it, rather than the payer (their customer). R is now insolvent, LP sues CIBC.

Held A certified cheque must be honoured, regardless of who requested certificationReasons If a cheque which is certified at the request of the payee is not honoured, such certification has no value. The

purpose of it is defeated. “There would be very little commercial utility in a payee obtaining certification. It would not have a promise to pay from the bank, independent from the drawer's obligation to pay.”

Barclays v. Simms is inapplicable. That case provides redress against a payee who takes advantage of an innocent mistake of a bank employee. But this does not apply to certified cheques. No bank is forced to accept to certify the cheque – and in this case, CIBC did it for a fee. Neither does CIBC contact its customer (payer) when it certifies cheques, so it puts itself in a vulnerable situation, if anything.

“The great advantage of treating certification as acceptance, whether at the instance of the payee or the drawer, is that it brings a certified cheque squarely within the framework of the Bills of Exchange Act”

The defence of estoppel is unnecessary with certified negotiable documents.

Why would the payee certify the cheque instead of cashing it? Well, here, the cheque serves as security – it can only be cashed if Rattray defaults, according to the parties’ K. LePage suspects that Rattray may back out of the deal, so it runs to the bank to have it certified.

Up until this case, the legal theory was this: if the cheque is certified at the request of the drawer, there is a waiver by the of its ability to countermand the cheque. If, however, the certification is requested by the payee, the same does not apply. LePage: first time in the history of banking law in Canada, the court woke up and said that there is no distinction between certification requested by the drawer or the payee! Why do people have the cheques certified? To have the added security. If a remanding order is still possible, there is no added security, and the act of certification is simply useless.

Remember National Slag: the payee tried to sue the drawee bank which violated the clearing rules. That jgmt established that there is no duty of care to the payee. Here, CIBC violated the clearing rules: it tried to return a certified cheque. Perhaps LePage did not raise this argument because it knew the outcome of National Slag. But Lemieux would have raised this argument anyway. CIBC certified the cheque!

So, bottom line: even if certification is made by mistake, it’s irrevocable. This is consistent with commercial expectations: certified cheques are supposed to be as good as cash. Simply: if certification were revocable, the purpose of certified cheques would be defeated. The certified cheques are actually better than cash: restitution is available for mistaken payments in cash.

Now, the “what if” game. What if the signature on R’s cheque had been forged, and the CIBC had certified the cheque bearing the forged signature? There was a weird case: company A sold gold to company B, and B gave a cheque, drawn on Hong Kong Bank (HKB), certified by the HKB. A deposited the cheque, and the cheque was returned unpaid: signature of the drawer was forged. Dispute btw A and HKB.

128(a) BEA: The acceptor of a bill by accepting it is precluded from denying to a holder in due course (a) the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the bill;

HKB is considered to be an acceptor; A – a holder in due course. So if you certify a cheque that bears a forged drawer’s signature, you live with your mistake. So the exception of Rule A4, section 4(b) is inapplicable.

The next question is: can the payee (B) claim the status of being a holder in due course? 55 BEA: the holder in due course takes an instrument in GF and for value, and with no knowledge of any defects. But there is an additional twist: 55(1)(b) at the time, the bill was “negotiated” to the holder. What does that mean? A negotiation is a transfer to the next person in line (subsequent to payee): by simple delivery (to bearer), or endorsement + delivery (to specific person). In Canada, the

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prevalent view is that the payees of instruments (whose name appears on the instrument) can never achieve the status of holder in due course, because there has not been any negotiation between them.

Also, Rule A4 does not talk about “forged drawer’s signature” – it only talks about material alteration and forged endorsement. VERIFY THIS (considering statement above)

5.5.3 Effect on the underlying obligation What is the main feature of certified cheques? The payee can go after both his payer and the bank which certified the

cheque. And a bank has a much better creditworthiness and deeper pockets. 126 BEA: whoever signs bears liability, whoever doesn’t – avoids liability. 128 BEA : states the acceptor’s liabilities.

The courts, of course, have assimilated certification into the acceptance provisions: there is a parallel. What is acceptance? 34 BEA et seq.: a signature constitutes acceptance. “Acceptance” is a signature of the drawee. Without the signature, there is technically no acceptance, and no relevant

provision in the BEA for stamp-certified items. That’s why certification is treated like acceptance, without actually being acceptance.

Sometimes payees get the cheque certified – why? LePage provides the answer.

1.1.1.19 Bank of Montréal v. Legault (2003, Québec C.A.)Facts Notary Legault (“L”) inadvertently served a client who was a criminal fraudster. The fraudster asked to use L’s

trust account at the BMO to ‘wire transfer’ funds from his supposed employer for his supposed transaction with a business partner. The so-called ‘wire transfer’ was actually effectuated by the fraudster by depositing two certified cheques for $180K and $143K fraudulently endorsed with 3rd party signatures into the BMO trust account. BMO accepted those cheques without requiring L’s endorsement. This allowed the fraudster scheme: cheques for those sums were then issued by L to the fraud associates (who pretended to be business partners), certified by BMO. The original cheques were subsequently returned unpaid through the clearing system due to discovered fraudulent endorsement (rule 4 section 4(b)). BMO debited L for those amounts. BMO invokes its customer contract with L that stipulates a chargeback provision.

Held BMO is estopped (fin de non-recevoir) from invoking its K-ual right due to its fault – failure to require L’s endorsement.

Reasons First of all, banks know that notary accounts are trust ones, and that notaries therefore don’t own those funds. 165(3) BEA makes a bank a holder in due course if the cheque “is delivered to a bank for deposit to the credit of

a person, and the bank credits him with the amount of the cheque” This must be interpreted as requiring the payee or legitimate endorser to be aware of the deposit.

Case at bar: the cheque was endorsed by an unknown 3rd party and deposited into L’s account. Even for L’s own deposits at the ATM, the BMO limited the allowable deposits to $100K, above which L’s physical presence at the branch and his endorsement were required. Thus, the BMO was negligent in not requiring L’s endorsement.

BMO is also negligent for not verifying the authenticity of endorsements on the cheques. In Aird, it was decided that a bank is responsible for verifying authenticity even when it comes to its own trusted client.

In Legault, the C.A. doesn’t say many facts that happened in the case. The cheques deposited into the ATM are not usually endorsed by regular people, because a bank becomes a holder in due

course even if the instrument is not endorsed. So the bank accepted the cheques from the fraudsters in Legault without the notary’s signature.

In Legault, the cheques submitted by the fraudsters were also certified! All the more temptation for the bank teller to accept them.

Lemieux: the fact that the transaction was represented as a “transfer” is red herring. It doesn’t make that much of a difference – the cheques deposited were certified. But we’ll come back to wire transfers. Those made through LVTS (“large value transfer system”) are irrevocable form the time of receipt by the bank.

Note that the notary calls up the bank several times, assuring himself that the transaction of depositing the (fraudster’s) money was successful, his trust account has funds, and he can write out a cheque to the 3rd parties (fraudsters’ partners)

So why is this case in the section on certified cheques? Because bank acted the way it did, because the cheque was as good as cash. But certified cheques are as goods as cash, but no better. If you are owed $100, and your D gives you 5 counterfeited bills of $20. You try to deposit these bills into your account, the bank refuses – has the debt been

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discharged? No. Same thing with fraudulently endorsed certified cheques – they are invalid! And the problem with them, is that they are probably easier to forge.

Rule A4, section 4(b): a drawee bank can return the instruments that came to it via clearing, EXCEPT for certified cheques: only if there is forged endorsement, or a material alteration after certification.

The whole Legault litigation could have been avoided if the following happened. The notary asks if the funds are available after the fraudster’s deposit. The teller says yes, but should the cheques prove fraudulent, the funds will be remitted to the payer (L’s account debited).

So this case is a slap on the wrist for having given too much credibility to the certified cheques. So, grand conclusion: certified cheques may be equivalent to cash, but still invalid if the whole thing is rotten forged!

Had this been a CmL case, theories of estoppel or unconscionability might have been invoked. CvL has the notion of fin de non-recevoir.

Me: keep in mind which parties are having the dispute, in order to ascertain which rules apply. Here, it’s between a bank and its customer; and uniquely, neither the drawee bank, nor the intended recipient (would-be holder in due course) is involved. As against the drawee bank, BMO cannot assert the status of a holder in due course (165(3) BEA does not apply), so it cannot hold the other bank to its certification. So BMO is left to bear the loss due to its negligence.

5.6 FRAUDULENT INSTRUMENTS There are 3 situations: the drawer (payer’s) signature is forged, an endorsement signature is forged, or the cheque is

materially altered. 48 BEA (1) Subject to this Act, where a signature on a bill is forged, or placed thereon without the authority of the person

whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority. (2) Nothing in this section affects the ratification of an unauthorized signature not amounting to a forgery. (3) Where a cheque payable to order is paid by the drawee on a forged endorsement out of the funds of the drawer, or is so paid and charged to his account, the drawer has no right of action against the drawee for the recovery of the amount so paid, nor any defence to any claim made by the drawee for the amount so paid, as the case may be, unless he gives notice in writing of the forgery to the drawee within one year after he has acquired notice of the forgery. (4) In case of failure by the drawer to give notice of the forgery within the period referred to in subsection 3, the cheque shall be held to have been paid in due course with respect to every other party thereto or named therein, who has not previously instituted proceedings for the protection of his rights.

48 BEA talks about the three situations. Para.1 gives the general rule: forged & unauthorized signatures are of no force. Corporations pass resolutions re: who has a signing authority. If a person not mentioned in that resolution signs the

corporation’s cheque, that’s an example of unauthorized signature. Forgery, of course, is fraudulent imitation of the real thing.

But there is a caveat in 48 BEA: the nullity of the signature kicks in unless “the person is precluded from complaining of forgery. Para. 2 is not very important for our purposes: one can ratify a forged signature. Para. 3: think BMO v. AG of Québec. If a bill bearing a forged endorsement is paid, the drawer has no recourse against drawee (which is the bank, in most cases), unless he gives notice of the forgery 1 year from discovering it.

The agreement btw banks & client has 30 days limit for reporting irregular transactions. The banks need to be able to close their books after a certain time, and not be bothered by possible claims. But no account holder is expected to know what his payee’s signature looks like, so there is no way to know that a fraudulent endorsement has been made. If the intended payee calls the drawer up, then there is notice. One year from that time is the limit, set by the BEA.

Para. 4 is just a complement: where the drawer fails to give notice, the cheque is deemed to have been paid in due course. Besides BEA, what other sources of law are there, to govern the actions of all the parties? There is also the bank-

customer contract. There may be a 30-day limit for reporting irregular transactions; there may be obligations imposed on the customer to set up internal controls for fraud.

There are also CPA rules. They provide specific recourses: a bank has the ability to return bad cheques through clearing. This is much quicker and cheaper for a bank to do than to sue the other bank for CmL remedies (e.g. restitution)

5.6.1 Forged drawer’s signature 128 BEA: acceptor is precluded from denying the genuineness of the drawer’s signature to a holder in due course: this

means forgery is not a defence to any action by holder in due course. Example: A purchases gold from company X. The

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A was required to deliver a certified cheque for the gold; X took the cheque and later discovered that the drawer’s signature was forged. The cheque was therefore certified by mistake, but the bank cannot refuse to pay up. 128(a) BEA, translated into ‘certified cheque’ language, says that the bank that certifies a cheque is precluding from denying to a holder in due course the genuineness of the signature.

Arrow Transfer and CP Hotels: the drawers were the victims, as their signatures were forged. Arrow Transfer’s employee forged 73 cheques, creating a fictitious enterprise in his name. The employee’s bank debited Arrow Transfer for 5 years. The discovery is finally made, Arrow Transfer seeks to recover its money. Potential Δ’s: the drawee bank (where Arrow Transfer is the client), the collecting bank, or the rogue (who is most often broke). Let’s look at the first one in detail.

5.6.1.1 Drawer against the drawee bank & the bank’s defences Suing the drawee bank. The bank which holds your money is the owner of that money, but has the obligation to repay

that money (it’s a contract of loan btw the customer and the bank). The basis of that action is the banking K and 48(1) BEA (forged signatures are wholly inoperative). The bank would use these defences: (i) verification of the account agreement or other exclusionary or exculpatory clauses, (ii) 48 BEA preclusion from raising forgery: the drawer, for some legal reason, cannot rely on 48’s general provision (think CP Hotels – me: if the duty were stated in the K…)

CRAWFORD (831) “preclusion may also arise by the negligence of the person seeking to set up the forgery. However, the S.C.C. in CP Hotels said that only conduct fitting the old narrow concept of ‘negligence in the transaction’ is sufficient for this purpose.” This means negligence in the preparation of negotiable documents by the drawers, in the interests of commercial certainty rather than efficient loss allocation. RE-READ THIS PART IN CP HOTELS

Arrow Transfer and CP Hotels: such employees are never authorized signatories: they must forge the signatures. Good managers establish internal controls, surprise audits, etc. They foresee disloyalty of certain employees. When a fraudulent operation is discovered, you put a countermand order, then you notify the bank of other irregularities.

What are the bank’s defences? o K between bank & customer which includes a stipulation that the customer must verify accounts within 30 days

or rest in peace. This was the exonerating clause in Arrow Transfer (me: remember the difference btw forged drawer’s signature and forged endorsements. For K-ual stipulations regarding endorsements, see below). Of course, if the bank’s manager forges the signature, the verification agreement will never protect the bank (1474 C.c.Q.: “A person may not exclude or limit his liability for material injury caused to another through an intentional or gross fault; a gross fault is a fault which shows gross recklessness, gross carelessness or gross negligence”)

o K btw bank & customer stipulating that the customer must set up internal controls in his business. CP Hotels and Arrow Transfer were both major companies which should have had controls. But remember, CP Hotels says that unless this duty is explicitly stated in the K, the defence will not work.

CRAWFORD (844) assuming that the bank has no defence in law (π is not precluded from setting up 48 BEA) or by its K (exclusionary clauses), the bank must reimburse the drawer for amounts paid by it on items bearing a signature that does not bind him. The theory is that by receiving a deposit, the bank expressly or impliedly contracts to repay it in accordance with the instructions of the customer. Payment on a forgery of the drawer’s signature is made without authority and must be repaid.”

o Can the customer’s bank shift the loss to the collecting bank, if the customer notified it within 30 days and set up internal controls? The answer is no: there is a delay in Rule A4 for the return of settlement; the delay is 24 hours from the time the paying bank can make a decision whether to pay or not. Remember, in the 1980’s banks attempted to return cheques outside of the delay (National Slag, Stanley Works), but were unsuccessful. Given the huge amounts of cheques that goes through the system, and the total chaos that would result from arbitrary return of cheques by all the banks, untimely return is unacceptable. The fact that Rule A4 doesn’t have any sanctions is of no importance. National Bank of Greece: the matter went to arbitration; the arbitrator awarded the collecting bank damages in the amount of the cheque.

o Can the paying bank use CmL restitution, or the CvL restitution de l’indu against the collecting bank? Re Hil-A-Don case. There have been cases in S.C.C. where the court said that, while normally such a recourse is available, other equitable considerations in the case of banks may prevail. 128 BEA (acceptor’s K): having paid the cheque as an acceptor, the bank cannot use the forgery to deny obligation. CmL tort of conversion: the collecting bank helps the depository, a fraudster, to commit the fraud. But does the collection bank owe any duty of care to the drawer? No. In Arrow Transfer, S.C.C. rejects the claim of conversion (see below)

o Now, if the collecting bank does end up with the loss, it will try to push the loss on to its customer, the drawer.

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5.6.1.2 Drawer against the collecting bank CRAWFORD (846) : such claims ought to be rare since they are not addressed by the BEA and, therefore, depend upon

principles of CmL. Certainly, the more conventional approach is for the drawer to claim against the drawee bank, leaving it to protect itself by making a claim over against the collecting bank or whatever other means may be available to it. … On authority, the S.C.C. decided, in Arrow Transfer, that a cheque form bearing only a forgery of the signature of the drawer was merely scrap paper, of no value … Since it was a complete nullity, it could not be deemed to have its face value for the purposes of the law of conversion.

“On a consideration of the dictates of justice, it appears that the risk that the instrument is a nullity properly rests with the drawee bank. It has specimen signature cards on file, and, if it chooses not to examine them to satisfy itself that it is acting on a valid mandate of its customer, it should bear the foreseeable consequences. Certainly, the collecting bank has no such sources available to it, and should not be penalized for assisting a fraud merely because the customer for whom it is collecting an instrument has dealt with a forged instrument.”

In the recent news Bear Sterns Bank became insolvent last Friday. This is scary, because it was 5th largest bank in the U.S.A. This is not

good news for other banks, and ripple effects are to come.

5.6.2 Fraudulent endorsement & 20(5) BEA CRAWFORD (845): BEA renders cheques with forged endorsement wholly inoperative: this means that the drawee bank

which pays on such a cheque did not do so in accordance with the client’s instructions. Some jurisprudence establishes that the customer’s contributing negligence may relieve the bank of liability. The drawer may sue the drawee bank in conversion (unless precluded from setting up forgery)

49 BEA: other parties’ recourses for forged endorsements. If the bank must indemnify the drawer, it can sue the previous endorsers. E.g. Lemieux issues a cheque to his landlord, Y, which is intercepted and signed with an imitation of Y’s signature. Lemieux’s bank can sue the bank which receives the funds (which is previous endorser in the line); and that other bank can sue the depositor. Limitation for such a recourse: “reasonable time” after awareness.

What about exonerating clauses in bank/customer K? There are no such clauses for forged endorsement – a drawer cannot know the signature of his payer (who may endorse the cheque). See below.

Cases: AG of Québec (1yr limitation – implicit condition in K), BOMA (fictitious payees), Legault (bank’s negligence deprives it of K-ual protection) and Gingras.

Very often, disgruntled employees are authorized signatories. Imagine such an employee wants to defraud his employer. The employee makes out a cheque to X, then forges X’s signature and deposits it in his own account. This is a stupid way to perpetrate fraud, because X will soon complain and the fraud will be discovered immediately. The smarter way is to make fake invoices for fake services, and make the cheques payable to cover those “expenses.” These cheques can even be signed by another person, who is a legitimate signatory. Then forge an endorsement of the fake payee and deposit the cheque into own account.

5.6.2.1 Drawer against the collecting bank

1.1.1.20 BOMA Manufacturing v. CIBC (1996, S.C.C. from BC)Facts BOMA is a company which employed a rogue bookkeeper, Donna Alm. Alm made out 155 cheques, totalling

$91K+ payable to a number of people connected with the company, and deposited them into her account. One of the payees on such cheques was “J. Lam” and “J.R. Lam” – a name similar to one of the company’s subcontractors named Van Sang Lam, and also to Alm’s first husband (she had a joint account with him), who had the same last name. Alm’s account was with CIBC – the bank credited her with the amounts on those cheques, without requiring any endorsement of the payer on the cheques (the name “Lam” gave the false sense of legitimacy). The other cheques – Alm forged endorsements of the payees. BOMA sues CIBC (the receiving bank) for the tort of conversion. CIBC relies on defences of (i) non-existent/ fictitious payees (20(5) BEA) and bank’s legislative status of holder in due course (165(3) BEA).

Held Bank is strictly liable for conversion; both defences failReasons First, conversion is wrongful interference with goods of another, and it’s a strict-liability tort, which excludes

contributory negligence (lack of any internal verification systems in BOMA) Second, point of clarification: “It is the intention of the drawer, not the signatory of the cheque, that is relevant,

as will be discussed in greater detail below. Alm is not the drawer because she cannot be said to be the directing

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mind of the corporate appellants; she simply had signing authority.” 20(5) BEA says that cheques payable to fictitious and non-existent payees must be treated as payable to bearer –

no endorsement is required. It’s an exception to 48(1) BEA which states that forged or unauthorized signatures on a bill renders the bill wholly inoperative and prohibits anyone form retaining or enforcing payment on them.

Who are non-existent/fictitious payees? What matters is whether they are real people, and whether the drawer (NOT Alm) intended to pay to them (Alm’s intention could not be vicariously imputed to BOMA – vicarious liability is inappropriate in this area of law)

So if a drawer does intend to pay a real person, then, notwithstanding the fact that the drawee has been induced to do so by a fraudulent manipulation of a rogue, the payee is NOT fictitious or non-existent. This is the case here: BOMA did intend to pay the people Alm put as payees on the cheques. This includes J.R. Lam, who BOMA honestly thought was their subcontractor Van Sang Lam.

Thus, the cheques were payable to order, and the bank had to require endorsement before crediting the amounts to Alm.

165(3) BEA applies to situations where a valid payee or endorsee deposits a cheque to a bank – in this situation, the bank is presumed to be a holder in due course, not liable for conversion. This is a simple policy rule: it’s much harder to defraud a company by issuing cheques payable to the rogue himself. But when it comes to cheques payable to a 3rd party, the bank must demand their endorsement. Defence fails.

So why is the cause of action here a complicated action in conversion against the collecting bank, rather than a simple action against BOMA’s own bank, RBC?

o Important to look at: verification agreement. But is BOMA expected to know what the endorsement signature of Mr. Lam looks like? No. In fact, there is an exception in the std agreement: verification duty does not apply to payments on forged or unauthorized endorsement. The drawer is not expected to be familiar with the signatures of all of its payees. So this clause of the bank/customer agreement is out.

o What about the provision on internal controls? CIBC stipulates, for example, that it will not be liable unless a fraud was so clever as to overcome any internal controls of the company. Lemieux thinks that is the reason BOMA did not sue RBC – because BOMA failed to institute internal controls.

The case is only concerned with conversion, and no other liabilities among the parties. In first instance, BOMA tried negligence against the CIBC, but that recourse died off before the S.C.C. Why? Lemieux: negligence carries with it a possibility of contributory negligence. On the one hand, how could CIBC simply accept cheques issued in someone else’s name (“Lam”) deposited into Alm’s account?? That’s outrageously negligent! But on the other hand, BOMA didn’t audit its own stuff, either.

Another problem is establishing the duty of care: there is no bank-client relationship there, and why would there be a duty to every possible drawee? So must use something else – conversion.

Page 62 of casebook, bottom of page: explains what conversion is. Top of page: CIBC admitted prima facie liability for conversion. It defences were (i) fictitious payee (20(5) BEA), and (ii) holder in due course. (165(3) BEA)

20(5) BEA: a bill payable to fictitious or non-existent payees may be considered as payable to bearer. If a cheque bearing forged endorsement or no endorsement at all is considered payable to bearer – problem solved, the banks are justified.

The question of whether a payee is existing or not is a question of fact. The question of fictitiousness is a question of intent: an existing payee could be fictitious, if his name is used despite the fact that no money is owed to him. And by the way, there is no known policy or reason for this provision.

Two cases cited by the court: in each case, the cheques were issued to non-existing payees, endorsement forged, and the money pocketed. Because the payees were non-existent, the detection of the fraud was very hard.

Alm is the mandatory (CvL) or the agent (CmL). Lemieux understands agency as a projection of the principal: whatever BOMA wants, Alm does. Yet the S.C.C. says that for the purpose of the fictitious payee rule, it is not the signatory’s intention we should focus on, but rather the drawee’s. BOMA did intend (or can be presumed to intend) to pay the payees, whereas Alm did not (she wanted to pocket the money of course) – page 71, middle. Only when a payee is intended, the drawee is entitled to protection, but not when the payee is not intended to be the payee… Lemieux does not know of any policy reasons for this.

But isn’t it the situation in most cases – where the drawer intends to pay the payees, but the funds are diverted by rogues? And certainly, BOMA did not intend Alm to appropriate the money – duh. Will there be any cases where payees will actually judged to be fictitious?? Even more sloppiness – “J.R. Lam” is a non-existent person, and this should have been the end of the story. The S.C.C. itself says that it’s a question of fact. Yet S.C.C. looks at BOMA’s intention and state of mind (page 72). “The trial J’s findings on this point were tantamount to a finding of fact.”

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Keep in mind the Fok Cheong case (cited in BOMA). A cheque is issued to a (real) creditor of the company by the president, the guiding mind, of a small company. The president then forges the creditor’s endorsement and deposits the money into his own account. Because the signatory is the guiding mind of the company, the S.C.C. ruled that his intention was the intention of the drawer, the company. Cheong never intended to pay the creditor (rather, he wanted to pocket the money), thus, the payee was “fictitious.” This would appear to be the only case where a payee can be found to be fictitious – the signing party is the “guiding money” of a corporation.

Fictitious payee issue always needs to be considered in forged endorsement situations. That’s a great defence for a bank. Keep this in mind: it is useful not only in recourses in conversion, but also in 48(3) BEA recourses.

The other defence is 165(3) BEA – holder in due course. Endorsement is not necessary when the bank accepts a cheque from a depositor (practical considerations). Holders in due course take cheques free and clear of any claims – including conversion, which is exactly that type of claim. S.C.C. asks: is it applicable in a case like this? When you read 165(3) BEA, the language is clear, and CIBC, on its face, has a wonderful defence. Except S.C.C. defines, on its own accord, the word “person” – S.C.C. interprets it as a “person who is legitimately entitled to the cheque.” That person must be a legitimate payee or endorsee. The policy reason in this case is, thankfully, clear. Think back to the Tardivel case, where Lemieux suggested playing with 165(3) BEA rather than misinterpreting 39(2) BEA.

5.6.2.2 Drawer against the drawee bank

1.1.1.21 Bank of Montréal v. A.G. of Québec (1975, C.A. Québec) -- repeatFacts The government of Québec issued a cheque to a 3rd party called Sheedo (compensation for expropriation), drawn

on its bank (the Δ BMO). A notary, who received the cheque, forged it by changing the payee name to his and deposited it to his bank of Caisse Populaire. BMO debited the government’s account. The government learned of the forgery and demanded its money back from BMO – more than 1 year later. Sections 49(3) and (4) of Bills of Exchange Act require a customer to inform the bank of forgery within one year – to be able to claim compensation.

Holding BEA adds to implicit obligations of a bank not to pay to forged cheques. But limitation period defeats action.Reasons The K btw a bank and its customer is supplemented by the banking customs and the law (e.g. BEA). “There is

no doubt that a banking contract between a banker and his client includes an obligation on the part of the banker not to pay a cheque to one who is not entitled to it”

When this implicit obligation is breached, a customer has a right of action against the bank, but BEA further imposes a condition that the action must be brought within 1 year.

Sidenote The π here tried to rely on Crown prerogative – immunity from limitation. This argument failed.

Here, the basis for the instruction to the bank to debit the client’s account is flawed. The government never instructed its bank to pay to the notary, rather than the legitimate payee. There was no std-form K, but even if there were a verification agreement, it would not have changed anything. The government would not know what the endorsement signature of the notary or Sheedo look like. Indeed, the std-form K’s have this exception in the verification agreement: payments made on forged or unauthorized endorsements.

What can BMO do? Rule A4 section 6(a). A paying bank can always return a cheque within timely delay, but one exception is forged endorsements. Forged endorsements can be returned at any time. Why? Because with forged endorsements, you never know when the fraud will be discovered. So the government could simply have notified BMO of the forgery, and BMO would shift the loss to Caisse Populaire.

Even if there were no 48(3) BEA, which sets 1 year as the limitation period for giving notice of forged endorsement (and logically affirms the idea that a victim of forged endorsement can claim reimbursement from the bank), the government would still be able to claim (provided that it’s within the limitation period). Read on.

What if there were no rule A4, 6(a)? 49 BEA: drawee bank can recover the amount of a cheque with forged endorsement from parties up the chain, provided that it notifies everyone who put his signature on an instrument within “reasonable time.” Remember that this provision was in place even before the CPA Rules came into existence – hence, a bit of redundancy here (the interesting question is whether any notice is required if the bank relies on Rule A4 and not 49 BEA)

Even if there was no 49 BEA, you would still find the conclusion in the CmL that the drawee bank has a recourse against the collecting bank – how could the drawee bank know of a the forgery? The payment was made on a mistaken belief. It’s restitution.

So what’s with Sheedo? It never received the money, and hence never signed the expropriation documents. The government must have surely issued another cheque to Sheedo, since the government needed the expropriation. If the government didn’t, what could Sheedo do? Could it have any recourses against other players in the scenario? CNB. v. Gingras answers this question.

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1.1.1.22 Canadian National Bank v. Gingras (1976, S.C.C. from Qué)Facts BD Construction received 5 cheques from its debtor, the City of Charlesbourg. The president of BD, Marcel

Desjardins (“M”) fraudulently endorsed the cheques and deposited them in his account for his own use. M’s Bank, CNB, accepted the cheques without bothering to look at BD’s resolution, authorizing the endorsements of its negotiable documents. The resolution authorized M and one Henri Blouin to sign & endorse cheques. Gingras, a trustee in bankruptcy of BD, is suing M and CNB jointly for the damages in the amount of the cheques.

Held CNB bank is liableReasons JJ distinguish Norwich Union case. I’m unclear about that case.

“In the case at bar, action was brought against the person who made the unauthorized endorsements and he was condemned to pay the full amount of the cheques. [M] certainly had the right to receive [the cheques], although he did not have the power to appropriate them [by fraudulently endorsing them]. .. I do not think that the company, which had regularly received them in payment of the debt due to it, could have a remedy against the drawer [i.e. Charlesbourg] because these cheques were subsequently fraudulently cashed by its president” The only remedy was against [M] and those who by their fault contributed to the conversion, that is, the bank which took the cheques for the personal account of M and obtained payment for them.

Even if such remedy were possible, Charlesbourg would turn around and sue M and CNB. It’s not “in the interest of justice” to cause a circuit of actions in guarantee.

Note By analogy, Sheedo cannot sue the government, since the government would then sue the notary & BMO, creating a circuit of actions.

5.6.3 Material alterations – not covered 144 BEA: materially altered bills are void. A material alteration is an alteration of a material part of a cheque: e.g. the name of the payee, the amount. Sometimes

dates are altered. 144(2) BEA: material alterations that are not apparent, not detectable by visual examination: a holder in due course may

avail itself of the bill as if it had not been altered, and enforce the payment according to the original tenor of the bill. E.g. a cheque is altered by having an extra “0” added, from “$10,000” to “$100,000.” A holder in due course can enforce payment for $10K.

We won’t cover this area: the recourses and patterns are the same. Section 144 BEA: material alteration renders instruments void – so same arguments can be raised as in forged endorsement. The paying bank has the same options (return to the clearing system within 90 days, or use CmL restitution). All types of fraud on instruments are dealt with in the same manner.

6.0 LETTERS OF CREDIT6.1.1 Definition In the area of int’l trade finance, letters of credit play a very big role. Letters of credit are the “true oldest trade” in the world. They’ve been around for 2000 years. It quickly became apparent,

2000 years ago, that travelling with a bag of coins was not a good idea (danger of theft). Merchants, not yet known as banks, operated businesses in various countries where they kept coins and accepted paper drafts, such as cheques, in order to facilitate payments. The merchants also accepted letters of credit.

The very basic feature of letters of credit is that it’s a perfect compromise btw vendor & purchaser. In a grocery store, simultaneous payment and delivery is possible between the customer and the store, but not in most types of trade, especially int’l trade. Both sellers and buyers are wary of each other: one wants immediate payment, another – immediate delivery.

In a perfect world, a buyer will get his fruits delivered, look at them, feel them, taste them, and then pay for them. But what fruit seller in Chile will agree to send off a ton of plums to Canada with no assurances of payment? Both the expectation of the seller and the expectation of the buyer are legitimate. So what do they do? Letters of credit.

There are many arrangements possible. The buyer can send someone to Chile with a cheque to inspect the plums, and make the transaction if the plums are good. But this is not very practical. The buyer may also accept a certificate of quality from a local Chilean food inspector. But then there is also the danger of damage caused by shipping.

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A bill of lading is a form of “receipt” that is given to the owner of the shipped property. This “receipt” has a special quality because it’s “negotiable.” Whoever possesses the bill of lading is the owner of the goods.

Suppose you arrange the shipment, the insurance, etc. and the Chilean vendor prepares an invoice for the plums. The vendor also prepares the bill of lading, and obtains a certificate of quality. All these documents are in the possession of the vendor. If there were a payment mechanism that would allow simultaneous exchange of these documents with money, then it would be the closest thing to grocery shopping, giving both parties solid assurances. Well, the letters of credit are that payment mechanism!

In a simple letter of credit, the buyer’s bank makes an “irrevocable undertaking” to pay the Chilean vendor upon receipt of specified documents: (i) bill of lading, (ii) invoice, (iii) quality certificate, whatever else.

6.2 THE PRINCIPLE OF AUTONOMY & EXCEPTION OF FRAUD

1.1.1.23 Bank of Nova Scotia v. Angelica Whitewear (1987, S.C.C. from Québec)Facts Whitewear, π, ordered men uniforms from Protecting Clothing Company (“Protective”), and asked its bank, the Δ

Bank of Nova Scotia (“Bank”) to issue a letter of credit, payable on the demand of a negotiating bank upon presentation of (i) letter of credit, (ii) supporting documents: bill of lading, invoice, etc. (see page 325) On July 18, the negotiating bank, Bank of Shanghai, presented the requisite documents + draft for the amount of the first invoice SS/3, and the Bank paid Shanghai that amount, debiting Whitewear’s account (on July 29). On August 2, Whitewear learned that one of the supporting documents presented to the Bank bore a forged signature. It informed the Bank, the Bank advised Shanghai. Shanghai asked the Bank to pay the second invoice 0014. Meanwhile, the π informed the Bank of certain discrepancies in the documents accompanying the draft for invoice 0014 (inspection certificate refers to wrong bank, quantity of merchandise incorrect, bills of lading calls for delivery in Vancouver instead of Montréal). The π also alleges that it informed the bank that the amount on the invoice was fraudulently inflated (the Bank denies this). The Bank nevertheless paid the invoice 0014. Whitewear sues it for that amount.

Held Bank is liable Reasons LeDain

First, an issuing bank is obliged to pay on a letter of credit if the supporting documents appear regular on their face; this obligation is independent of the performance of the underlying K. The only exception is the fraud exception: a bank must not pay if a fraud is committed by the beneficiary of the credit, and this fraud is sufficiently brought to its knowledge by its customer before payment of the draft (or if the fraud is proven to court in application for injunction, to restrain the bank from paying)

The fraud exception only applies to fraud by the beneficiary of credit, not to 3rd party fraud of which the beneficiary is innocent. The exception is also not opposable to a holder in due course of a draft on letter of credit. RESEARCH THIS

Case at bar: not sufficient evidence to show that Whitewear brought fraud to the attention of the Bank. It pointed out discrepancies, but no specific reference to the fraudulent inflation of price on invoice 0014. The fact that the Bank knew about the forgery in invoice SS/3 has no bearing to the question of invoice 0014: the Bank was entitled to assume that it was fully informed with respect to 0014.

Rule of documentary compliance states that documents accompanying letter of credit and the terms of the letter of credit must converge (reasonably close examination required). This does not extend to minor discrepancies.

Case at bar: variations in the accompanying documents were too minor to warrant application of the rule. However, the discrepancy on the bill of lading (destination) is major, and warrants application of the rule of documentary compliance. The fact that Whitewear eventually accepted goods (under protest) and sold them (to minimize loss), i.e. the fact that K was performed and that Whitewear was not prejudiced by something other than the actual discrepancy, has no importance to payment of a letter of credit.

Once the letter of credit is given, the bank becomes liable. It’s like the certification of a cheque – the bank satisfies itself that its customer will reimburse its payment.

The only condition to the payment of the LOC is the presentation of the necessary documents. Protective Clothing uses its bank, Bank of Shanghai, to effectuate the payment – that is, Protective discounted its LOC at Shanghai. A payment is made, and Whitewear’s account is debited. Then Whitewear brings up a fraud…

There were 2 issues: (i) were the presented documents in conformity with the requirements of the LOC, and (ii) had fraud been sufficiently proven.

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The presiding judge, LeDain J, is a very meticulous academic: he covered all grounds, not just to resolve an issue at hand, but to set a comprehensive precedent which would last for many years. Very useful jgmt. That’s why this $20K claim made it all the way to the S.C.C.: it had important issues which needed to be discussed.

Vendors & buyers always have a bickering session after the goods arrive: something is always not right with the merchandise. The beauty of LOC is that it’s completely independent of this kind of bickering. When a buyer who pays with a regular cheque discovers a defect with the merchandise, he may be able to call his bank and order stop of payment. But not with LOC.

In the case of Angelica, if the buyer tried to stop payment by telling its bank that the uniform is defective, the bank would be entitled to answer: this is not my problem, and you will still pay (page 328). But here, the problem was the possibility of fraud. But Whitewear brings it up after the payment is made.

Documentary compliance: what were the problems? One of the documents refers to the wrong bank (not BNS). Another document states a different quantity than indicated on the invoice. Finally, the bill of lading and the commercial invoice diverge when it comes to indicating the sea port of arrival (Montréal v. Vancouver). Missing this last blunder made the bank liable.

So the payment mechanism of LOC is totally independent of the relations between the commercial parties, but there is one and only one exception: fraud. You don’t want LOC, however reliable it must be, to help perpetrate the fraud. In the particular case of Angelica, fraud is just not found to have been sufficiently proven to the bank prior to payment.

Fraud can be established before payment (to get injunction) or after payment (to get restitution of the debited money). The burdens of proof are different for the two.

LOC can be used either as a method of payment, or as security (precaution), if you craft your documents well enough. The documents, which must be presented with the LOC, can be a certificate signed by the beneficiary, e.g. a “bid bond,” say, for a project in Algeria. Each bidder is asked to submit a guarantee, which will reimburse the company for its expenses and trouble in case the winning bidder fails to perform. Each bidder can obtain a LOC payable to the company, and, in the case of the chosen bidder’s failure to perform, the company can get payment by presenting the bid bond together with a certificate, signed by itself, that attests to non-performance by the bidder, to the bank.

The fraud exception is placed in a spectrum. Sometimes a buyer will receive such garbage instead of merchandise, that this transaction will be tantamount to fraud. When will a K-ual performance be so bad as to constitute fraud? It’s a question for deliberation in each case.

o Lemieux once had a case where a bill of lading was forged – the ship arrived with no such merchandise on it! Meanwhile, the fraudster presented the bogus bill of lading to the bank and obtained money.

The arrangement btw the bank and the customer depends on their relationship. If the customer is not trusted, the account will be debited right away.

6.2.1 The law on letters of credit – no official codified rules There is no local law governing LOC! ICC (International Chamber of Commerce) has codified the basic rules regarding LOC. Most LOC issued today will refer

to the ICC rules governing letters of credit. Page 250 of casebook: there is an old version of the ICC rules. ICC rules are not law, of course, but model rules adopted by private parties. Some LOC don’t even refer to international rules.

So there is CmL on LOC, which has been accumulating for years. That’s what LeDain J refers to, when he talks about “general principles” of LOC.

Another reason why this $20K case made it all the way to the S.C.C.: pages 339-40, the case arose in Québec, where we don’t have the CmL, but rather our Québec civil law. The S.C.C.: this division is unacceptable in this area, because the law on LOC cannot be different everywhere, in every country, as this would defeat the purpose of LOC. The very reason for LOC is facilitation of international trade.

6.3 EFFECT ON UNDERLYING OBLIGATION

1.1.1.24 Barclays Bank of Canada v. Price Waterhouse (liquid. Of CCB) (1999, C.A. Alta.)Facts Barclays (Cr) loaned a sum of $450K to a company called Pacific. Pacific moved its banking to the Canadian

Commercial Bank (“CCB”), and transferred its Barclays loan to CCB in the following way: CCB took security in Pacific’s collateral, and issued an irrevocable letter of credit to Barclays. CCB then became insolvent, and Barclays claims priority for repayment of its letter of credit by CCB.

Holding The letter of credit has priority – ref. sec. 85 Canadian Payment Associations Act (“CPAA”)

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Reasons The Canadian Payments Association Act provides a definition of the “priority payment instruments” and also an exception to priority where an instrument is meant to serve as payment between two banks (two members of the CPA)

“The object of the priority provisions of the Act is to confer, in the interest of commercial activity, a special status upon money orders, bank drafts and similar instruments not enjoyed by mere general or trade debts. The common feature of priority payment instruments is the assurance of payment so long as the issuing bank has funds.”

The commercial purpose of the instrument in question (which is targeted by the CPAA) is to offer assurance of payment to the payee by reliance on the creditworthiness of the issuing bank. The risk of non-payment is shifted from the original D to the issuing bank. The issuing bank then takes security in the D’s collateral.

Here, the letter was to provide security for Barclays’ loan. This was not issued from one bank to another for effecting payment between them. The purpose of the

legislation is to ensure trustworthiness of banks in the eyes of customers (“the policy of promoting, here and abroad, the commercial reliance upon the credits of Canadian banks suggests that a domestic or foreign beneficiary be protected). The clearing transactions between the members are excluded.

The claims of members of the clearing system against each other, in other words, rank as ordinary claims.

We have seen this case before (see above). Now we look at this case from a different perspective. Here, the LOC was payable by a simple demand by the Barclays (“clean letter of credit”). This is the minimal requirement

for a LOC. Typically, in a D-Cr negotiations, the Cr has the upper hand and dictates the conditions for the LOC. Price Waterhouse is a story of an insolvent bank attracting an insolvent client… Barclays, as the Cr, makes the demand on

the LOC; CCB of course is insolvent and fails to pay up (by the way, the insolvency of CCB was the last bank insolvency in Canadian history, so far). So this case concerns bankruptcy.

Canadian Payments Association Act: special status given to certain payment instruments. Why? Because due to the special nature of those instruments, they are trusted on the market, and the government must protect that. It’s necessary for healthy economy. So they must be given priority in the case of bankruptcy of a bank (because failure to pay it will result in a ripple effect on other banks). The pecking order:

o Certified chequeso “Priority payment instrument”: money orders, bank drafts and “similar instruments”

The question was: is LOC a “similar instrument”? What are the differences btw certified cheques and LOC? A certified cheque is, by definition, an unconditional order to pay – otherwise, it cannot a negotiable instrument. LOC, on the other hand, is conditional on presentation of the required documents. Well, here, it’s a “clean” letter of credit. Is there any functional differences between a clean letter of credit and a certified cheque? No.

If 3rd party-issued certificates and other documents are relied on, then the situation is different. If there are conditions attached, a LOC would be different from certified cheque. Remember 1564 C.c.Q. which talks about what discharges an obligation to pay money. Ask how this relates to the policy justification of trustworthiness of banks which needs to be protected

7.0 WIRE TRANSFERS AND DEBIT CARDS It took years to develop the technology that supports debit and credit card transactions. Point of sale is a mechanism

typically for consumers. LVTS is for commercial parties.

7.1 POINT OF SALE How does the point of sale work? Both the customer and the merchant have their banks. The sliding of the card and the

entering of the PIN is an authorization, which is sent electronically to the payer’s bank. Interac is a messaging system designed to bring instructions to the payment bank. The actual payment is a different process, initiated by the paying bank through the clearing system.

The payment mechanism is ACSS (automated clearing and settlement system): it is initiated right away, but settled the next day. Rule A4 section 3(b): unlike other transactions settled through the ACSS, the POS funds transfer is irrevocable.

Having introduced the card and entered your PIN, you would be unable to call up your bank and revoke the payment (unlike with cheques). The merchant’s account is credited the next day once the banks settled through the ACSS.

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All of this is filled with legal questions, but there is no legislation on it (unlike in the U.S.A. for example). The only source of rules is the Automated Clearing and Settlement System. What should the legal relationship be between the various parties, e.g. customer and its bank, merchant and its bank. In Canada, we only have “self-regulation”! That is, the government of Canada has delegated the task of regulation to the CPA. CPA adopted a “Debit Card Code” designed to establish minimum requirements for terms and conditions btw customers & banks, and merchants & bank.

o The vulnerable part of the transaction is authorization. Someone else can get a hold of the debit card and use it. Here, we come back to the customer-bank relationship, which we studied. The money belongs to the customer, and it is borrowed by the bank. If the bank pays out money without the client’s authorization, it should be liable for reimbursement.

o But how can the bank ever know who is using your debit card? A fraud by a customer (conveniently “losing” the card, and having the partner-in-crime “find” it and use it, and have the bank reimburse you afterwards)

o The PIN number protects you, and apart from situations where it is extorted from you at a gunpoint, there is no way to know it (unless the customer is very stupid)

o 430 et seq. Vol.-II: an example of a std agreement which is supposed to conform with the Debit Card Code. It addresses unauthorized uses of the card: there may or may not be a maximum amount of recovery from the bank. Typically also, there is a duty imposed on the customer not to disclose its PIN to anyone else. Also, no recovery unless the customer shows that he has acted prudently with regards to his card and his code. The bank requires a certain burden of proof to show prudence of the customer.

o Revocation of funds. Consumers often have the right to return merchandise. The system is able to do a reverse transaction and credit the customer’s account – which is NOT countermanding, but rather a transaction that is exactly the reverse of the customer merchant payment. Or the stores can give you back its own money, having been credited with yours already, or give you “store credit” which you can use to get other stuff.

Debit card technology is evolving: instead of using magnetic strips, we will probably switch to chips. Magnetic strips are susceptible to cloning. Lemieux has already been a victim of card cloning several times (!)

7.2 LVTS In the Tayeb case, there is an explanation of how CHAPS works. LVTS is the same-day settlement mechanism. Some credit agreements say “payment must be made in same-day funds” : the Cr will know that on the same day that the

payment is made that it will have final and irrevocable use of the transferred funds. Normally, the cycle leading to finality of payment is much longer. In Canada, we don’t even have a definite time limit

guarantee. CHAPS: instructions are given by the payer to its funds to effectuate a transfer: supplying the Cr’s name, amount and Cr’s

banking information. This initiates the request for the settlement of the transfer. Remember that each bank in a clearing system has an account at the central bank, which is used for settlement among

banks. Typically, each of the banks has pledged a security to the central bank, sufficient to cover the day’s settlement amounts. If the pledge is not sufficient, the transaction is refused. The system reduces systemic risk to the maximum (one bank’s insolvency contaminating the solvency of all other banks).

Typically, there are many small transfers and a few very large transfers, e.g. in the amount of $2 billion (which amount to 80-90% of all value transferred). The huge transfers present the greatest systemic risk. If the participating bank has sufficient security at the central bank, the settlement goes through and becomes irrevocable.

The difference with CHAPS and the Canadian system is the way the systemic risk is handled. LVTS rules in Canada : 238-239 Vol.-I. Rule 42 of the rules: once the message (to transfer funds) is approved for the

risk-screening, it cannot be revoked. Rule 43: Once the message is received, the receiving party shall make the amount finally and irrevocably available to its customer. In Tayeb, even though CHAPS does not have the same explicit provision, the J arrives to the same conclusion. Look in the section “Money Laundering Act” under Tayeb.

In Canada, to encourage people to use LVTS rather than cheques, the government restricted the use to cheques to a maximum of $25 million. Why? Because LVTS is secure, dealing with systemic risk, which ACSS cannot deal with.

In terms of legislation, there is very little on LVTS. But again we have the same relationship of customer-banker, etc. Before LVTS, the same cheques circulated among companies (through endorsement), but not anymore. Endorsement is

obviously impossible with wire transfers. So what happens when a large amount is transferred to a party in a different country? There is no “international LVTS.”

One can use SWIFT: a bank in Canada would send a SWIFT message to the receiving bank in, say, Poland. The Polish bank has an account with the Canadian bank. The Polish bank would send internal instructions to receive funds in such an

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account. SWIFT is nothing more than a secure messaging system – it is not a clearing mechanism. So, just like with debit cards which are protected with PIN, SWIFT ensures that only the authorized people can send in messages.

Concluding remarks: Canada doesn’t have any wire transfer legislation (in U.S.A., UCC talks about fund transfers), only the LVTS rules. The ability to countermand is negated by the LVTS rules.

What could go wrong with the LVTS? The person giving instructions may not be the person authorized to do so (e.g. a disgruntled employee). There may be a mistake in writing the bank account, resulting in misdirected payments. There are limited exceptions to the irrevocable nature of the LVTS.

Other means of electronic payment: preauthorized payments, magnetic tapes used to pay a large number of employees.

Exam: will be a "discuss" question, and a trans-systemic question (e.g. comment on differences btw American & Canadian approaches, which gets you thinking along philosophical lines) + fact pattern

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8.0 IndexC.c.Q. Pages

1426 C.c.Q. ………………………………..171474 C.c.Q. ………………………………..22, 411557 C.c.Q. ………………………………..211564 C.c.Q.: ……………………………….3, 36, 492440 C.c.Q. ………………………………..36

BEA Pages

2…………………….……….323…………………….……….344…………………….……….27, 3016………………….………...26, 27, 28, 2918(3)…………………………2920…………………..………..3020(4)…………………………29, 3020(5)…………………………29, 30, 42, 43, 4421…………………..………..3022………………….………...27, 3023………………….………...27, 28, 3024 ………………….………..10, 2825…………………..………...2727………………….………...3034……………………………37, 3935……………………………37, 3836……………………………3738……………………………26, 31, 3239……………………………26, 31, 32, 36, 4440……………………………3148 ……...……………….…...17, 23, 35, 40, 41, 43, 44, 4548(1)…………………….…..23, 41, 4349…………………….……...42, 4549(3)…….…………….…….16, 17, 26, 4450……………………………3051……………………………3052……………………………2653……………………………3354……………………………3355……………………………33, 34, 35, 3957……………………………33, 3459……………………………3260……………………………3362……………………………3366……………………………3373……………………………32, 33, 34126………………….……….39128………………….……….33, 37, 39, 41, 42129…….…………….………3, 26, 31, 32144……....………….……….17, 35, 36, 45167………………….……….17

129…………………….3, 26, 31, 32130…………………….37132……………….……32144…………………….17, 35, 36, 45165……………………..29165(3)…………………31, 32, 39, 40, 43, 44167…………………….17176…………………….29

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