Teva Canada Limited Appellant v. TD Canada Trust and Bank of Nova Scotia, 2017 SCC 51

SUPREME COURT OF CANADA Citation: Teva Canada Ltd. v. TD Canada Trust, 2017 SCC 51, [2017] 2 S.C.R. 317 Appeal Heard: February 24, 2017 Judgment Rendered: October 27, 2017 Docket: 36918 Between: Teva Canada Limited Appellant and TD Canada Trust and Bank of Nova Scotia Respondents - and - Canadian Generic Pharmaceutical Association Intervener Coram: McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté, Brown and Rowe JJ.

Reasons for Judgment: (paras. 1 to 76) Abella J. (Moldaver, Karakatsanis, Gascon and Brown JJ. concurring) Joint Dissenting Reasons: (paras. 77 to 156) Côté and Rowe JJ. (McLachlin C.J. and Wagner J. concurring) Teva Canada Ltd. v. TD Canada Trust, 2017 SCC 51, [2017] 2 S.C.R. 317 Teva Canada Limited Appellant

v. TD Canada Trust and Bank of Nova Scotia Respondents and Canadian Generic Pharmaceutical Association Intervener Indexed as: Teva Canada Ltd. v. TD Canada Trust 2017 SCC 51 File No.: 36918. 2017: February 24; 2017: October 27.

Present: McLachlin C.J. and Abella, Moldaver, Karakatsanis, Wagner, Gascon, Côté, Brown and Rowe JJ. on appeal from the court of appeal for ontario Commercial law — Bills of exchange — Fraudulent cheques — Conversion — Defences — Banks — Approach to determine whether payee is “fictitious or non-existing” within meaning of s. 20(5) of Bills of Exchange Act — Employee implementing fraudulent cheque scheme using similar or identical names of employer company’s real customers to whom company owed no debt — Employer’s accounts payable department issuing cheques with mechanically applied signatures — Employee opening bank accounts in names of registered businesses and depositing fraudulent cheques — Whether company or collecting banks should bear loss resulting from fraud — Whether collecting banks liable to company for conversion — Whether cheques payable to fictitious or non-existing person — Bills of Exchange Act, R.S.C. 1985, c.

B-4, s. 20(5). T, a pharmaceutical company, was the victim of a fraudulent cheque scheme implemented by one of its employees, M. M’s scheme involved drafting false cheque requisition forms for business entities with similar or identical names to those of T’s real customers, to whom no debt was owed. Based on M’s fraudulent forms, T’s accounts payable department issued the cheques and mechanically applied the requisite signatures. M registered the business names as sole proprietorships and opened bank accounts at several banks.

In total, he deposited 63 fraudulent cheques totaling $5,483,249.40 into these accounts and eventually removed the funds. T filed an action claiming that the collecting banks involved in negotiating the fraudulent cheques are liable for conversion, a strict liability tort. The banks argued that the payees in this case were fictitious or non-existing and that they were not, as a result, liable for conversion. Under s. 20(5) of the Bills of Exchange Act , it is a defence to the tort of conversion if cheques are made out to “fictitious or non-existing” payees.

The defence operates by rendering the impugned cheque “payable to bearer”, such that mere delivery — without endorsement — effects negotiation. The cheque would otherwise be “payable to order”, require an endorsement, and, without such endorsement, be wrongly converted by the bank. The motions judge found that the payees were not fictitious or non-existing within the meaning of s. 20(5); therefore, the banks could not rely on that defence and were ordered to pay T the full amount owing.

The Court of Appeal concluded that the motions judge erred in determining that the banks should bear the loss and T’s action for conversion could not succeed. Held (McLachlin C.J. and Wagner, Côté and Rowe JJ. dissenting): The appeal should be allowed and the decision of the motions judge restored. Per Abella, Moldaver, Karakatsanis, Gascon and Brown JJ.: The question at the heart of this case is which innocent party — T or the collecting banks — should bear the loss resulting from fraud?

The Bills of Exchange Act should be interpreted in such a way that drawers and banks are exposed to the risks created by the fraudulent use of the system, but the banks are the more significant beneficiaries of the bills of exchange system. It is therefore appropriate, in certain circumstances, for them to bear risks and losses associated with that system. To allocate losses to the drawer for having failed to identify and detect the fraud is inconsistent with the strict liability tort of conversion, which makes any negligence on the part of the drawer or the banks in preventing the fraud irrelevant.

The Court has, in multiple decisions, provided a two-step framework which outlines what a bank must prove to demonstrate that a payee is fictitious or non-existing. The first step — the subjective fictitious payee inquiry — asks whether the drawer intends to pay the payee. A payee is fictitious when the drawer does not intend to pay the payee, meaning that the payee’s name is inserted by way of pretence only.

The underlying rationale behind the fictitious payee rule is that if the drawer did not intend that the payee receive payment, such as in cases of fraud, the drawer should not be able to recover from the bank. As a result, if the drawer does not intend to pay the payee, the payee will be fictitious, the cheque will be payable to bearer, and the banks will be able to rely on the defence in s. 20(5). In this sense, the fictitious payee analysis is subjective. The Court’s

interpretation of fictitious payees as incorporating a subjective standard is deeply rooted in the common law, which s. 20(5) of the Bills of Exchange Act was intended to codify. This approach is also sensitive to commercial realities. Attributing an intention to pay recognizes that, particularly in a large corporation, a specific intention by the guiding mind of the corporation is not directed to each individual cheque. To require such an intention would ignore the realities of the cheque issuing process in many organizations.

If the bank proves that the drawer lacked such intent to pay the payee, then the payee is fictitious and the drawer is liable. If the bank does not prove that the drawer lacked such intent, then the payee is not fictitious, and the analysis proceeds to step two. The second step — the objective non-existing payee inquiry — asks if the payee is either (1) a legitimate payee of the drawer; or (2) a payee who could reasonably be mistaken for a legitimate payee of the drawer. If neither of these is satisfied, then the payee does not exist, and the drawer is liable.

If either is satisfied, then the payee exists, and the bank is liable. Whether a payee is non-existing is a simple question of fact, not depending on anyone’s intention.

There is no reason to create a new version of this test. In enacting s. 20(5), Parliament intended to codify the common lawfalse payee defence, including subjective considerations. No express language in s. 20(5) ousted these subjective considerations. Thereare no compelling reasons that the past precedents of the Court were wrongly decided and should be overruled. The fact that there aredissenting opinions on this issue is not a basis for overruling a precedent. Further, there is no evidence that the jurisprudence on fictitiousand non-existing payees reflects unsound public policy on the allocation of risk.

Banks are well-situated to handle the losses arising fromfraudulent cheques, allowing those losses to be distributed among users, rather than by potentially bankrupting individuals or smallbusinesses which are the victims of fraud. In this case, since M was not lawfully entitled to the cheques, the banks are prima facie liable for conversion. It is acceptedthat T did not participate in the fraud. It follows that none of the payees were fictitious.

Further, all payees were either (1) knowncustomers of T’s; or (2) companies whose names could reasonably have been mistaken for its actual customers, such that all payeesexisted. Therefore, none of the payees in this case were either fictitious or non-existing. As a result, the defence in s. 20(5) does notapply and the banks are liable for conversion. Per McLachlin C.J. and Wagner, Côté and Rowe JJ. (dissenting): A simplified, objective approach to the

interpretation ofs. 20(5) of the Bills of Exchange Act should be followed. The current focus placed on subjective intentions and the existence ofreasonable beliefs in the mind of the drawer brings uncertainty to Canada’s negotiable instruments and payment system. The payees hereare fictitious and non-existing on an objective

interpretation of s. 20(5), and therefore, the banks should be entitled to rely on s. 20(5) as adefence to the tort of conversion. The appeal should be dismissed and past precedents from the Court which adopted a subjectiveapproach should be overruled. Under this proposed approach, the first step in determining whether an instrument ought to be considered as payable tobearer under s. 20(5) of the Act involves determining whether the payee is a non-existing person. Under an objective approach, a payeewill be non-existing where the payee does not in fact exist at the time the instrument is drawn.

The non-existence of the payee obviouslymakes endorsement by this person impossible. Thus, such a cheque may be treated as payable to the bearer, providing the banks with adefence to the tort of conversion. If the payee is an existing person, then a second inquiry is required to determine if the payee is fictitious. A payee will befictitious where there is no real transaction between the drawer and the payee. By definition, or necessary implication, a payee who isnon-existing is also fictitious (given that there can be no real transaction with a person that does not exist).

But a payee who is a realperson can nevertheless be fictitious. This is the case where the payee, despite being a real person, is not entitled to the proceeds of thecheque because there is no underlying transaction with the drawer. This approach does away with all considerations of intent. Where a cheque is drawn to the order of a person who does not infact exist, or to the order of a person who exists but who is not entitled to the proceeds of the cheque, s. 20(5) will apply, regardless ofthe intent of the parties involved in the creation of the cheque.

It does not matter that such a situation is the result of a deliberate choice,of an innocent mistake by the drawer, or, as is the case here, of fraud committed on the drawer. This approach to s. 20(5) is not novel.Rather, it returns Canadian jurisprudence to the principles underlying the earliest

interpretation of s. 20(5). This

interpretation supports the purpose of the bills of exchange system. The principles of negotiability, certainty, andfinality are integral to the operation of the Act. To give effect to these principles, the negotiability of a cheque must be determinable onits face. Otherwise, the efficiency created by the bills of exchange system would be undermined as collecting banks would be required toconduct an investigation into subjective factors to determine the validity of every cheque. Rather than requiring a bank to verifysubjective intent and drawer belief, it is more congruent with the purpose of the Act to adopt an

interpretation that encourages drawers,prior to the drawing of a cheque, to ensure that the cheque is drawn for a real transaction. A bank’s legal position will no longer dependon facts unknown to it. The policy rationales for this approach are significant. First, the proposed objective approach allocates the risk of lossesfrom cheque fraud to the party in the best position to detect and minimize such fraud: the drawer. Where a drawer is fraudulently inducedinto drawing a cheque to the order of someone with whom the drawer has no real transaction, the drawer will bear the loss.

It matters notwhether the fraudster was an employee or a third party, whether the fraudster might be the directing mind, or whether the payee isreal. In all such a cases, the banks will be able to successfully avail themselves of the protection granted by s. 20(5) against an action inconversion by the drawer. The drawer is the party in the best position to detect and prevent cheque fraud, since it is able to implementcheque approval policies and fraud detection measures such as audits. By contrast, banks are not in the best position to prevent chequefraud on the drawer.

The second policy rationale for this approach is that it simplifies the analysis to be performed ex post facto bycourts to determine whether a payee is non-existing or fictitious under s. 20(5). The Court should not continue to apply an

interpretation of s. 20(5) that is inconsistent with the purpose of the Act and theprinciples underlying the bills of exchange system. Although the Court does not lightly depart from its own precedents, there arecompelling reasons to do so in this case. Courts have struggled to apply the subjective approach. The proposed objective approach willadd much needed predictability to the s. 20(5) analysis and increase certainty. It offers a needed course correction that will return thejurisprudence to a proper

interpretation of s. 20(5). In this case, two payees were invented by M and did not in fact exist. They are therefore non-existing under s. 20(5). Theother four payees are real entities. However, the cheques were for false purchase orders and thus there were no underlying transactionswith the payees. Accordingly, all payees in this second group were fictitious under s. 20(5). In the result, the banks were entitled to treatall the cheques as payable to bearer. Cases Cited By Abella J. Applied: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, (SCC), [1996] 3 S.C.R.727; Fok Cheong Shing Investments Co. v. Bank of Nova Scotia, (SCC), [1982] 2 S.C.R. 488; Royal Bank of Canada v.

Concrete Column Clamps

(1961) Ltd., (SCC), [1977] 2 S.C.R. 456; not followed: Bank of England v. VaglianoBrothers, [1891] A.C. 107; referred to: Metroland Printing, Publishing and Distribution Ltd. v. Canadian Imperial Bank of Commerce(2002), (ON CA), 158 O.A.C. 111; Clutton v. Attenborough & Son, [1897] A.C. 90; Vinden v. Hughes, [1905] 1K.B. 795; North and South Wales Bank Ltd. v. Macbeth, [1908] A.C. 137; Harley v. Bank of Toronto, (ON CA), [1938]2 D.L.R. 135; Bank of Toronto v. Smith, (ON CA), [1950] 3 D.L.R. 169; Banque de Montréal v. Barbeau, [1963] B.R.753; Fix Fast Ltd. v. Royal Bank of Canada, Que. Sup.

Ct., No. 681,011, May 21, 1970; Metroland Printing, Publishing & DistributionLtd. v. Canadian Imperial Bank of Commerce (2001), (ON SC), 14 B.L.R. (3d) 212; Canada v. Craig, 2012 SCC 43,[2012] 2 S.C.R. 489; Kepitigalla Rubber Estates, Ltd. v. National Bank of India, Ltd., [1909] 2 K.B. 1010. By Côté and Rowe JJ. (dissenting) Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, (SCC), [1996] 3 S.C.R. 727; Cluttonv. Attenborough & Son, [1897] A.C. 90; Bank of England v. Vagliano Brothers, [1891] A.C. 107; Royal Bank of Canada v. ConcreteColumn Clamps

(1961) Ltd., (SCC), [1977] 2 S.C.R. 456; Canada v. Craig, 2012 SCC 43, [2012] 2 S.C.R. 489; Grantv. Vaughan (1764), 3 Burr. 1516, 97 E.R. 957; Minet v. Gibson (1789), 1 R.R. 754; Tatlock v. Harris (1789), 3 T.R. 174, 100 E.R. 517;Vinden v. Hughes, [1905] 1 K.B. 795; North and South Wales Bank Ltd. v. Macbeth, [1908] A.C. 137; Fok Cheong Shing InvestmentsCo. v. Bank of Nova Scotia, (SCC), [1982] 2 S.C.R. 488; Bazley v. Curry, (SCC), [1999] 2 S.C.R. 534; S.C.R. 833; R. v. Chaulk, (SCC), [1990] 3 S.C.R. 1303; R. v. Henry, 2005 SCC 76, [2005] 3 S.C.R. 609; Ontario(Attorney General) v.

Fraser, 2011 SCC 20, [2011] 2 S.C.R. 3; Nishi v. Rascal Trucking Ltd., 2013 SCC 33, [2013] 2 S.C.R. 438; (2001), (ON SC), 14 B.L.R. (3d) 212, aff’d (2002), (ON CA), 158 O.A.C. 111; Rouge ValleyHealth System v. TD Canada Trust, 2012 ONCA 17, 108 O.R. (3d) 561; R. v. Robinson, (SCC), [1996] 1 S.C.R. 683. Statutes and Regulations Cited Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 9, 20(5), 48, 165(3). Bills of Exchange Act, 1882 (U.K.), 45 & 46 Vict., c. 61, ss. 7(3), 97(2). Bills of Exchange Act, 1890, S.C. 1890, c. 33, s. 7(3). Limitations Act, 2002, S.O. 2002, c. 24, Sch. B.

Authors Cited Chalmers and Guest on Bills of Exchange, Cheques and Promissory Notes, 18th ed. by S. J. Gleeson. London: Sweet & Maxwell, 2017. Chalmers, M. D. A Digest of the Law of Bills of Exchange, Promissory Notes & Cheques, 3rd ed. London: Stevens and Sons, 1887. Chalmers, M. D. A Digest of the Law of Bills of Exchange, Promissory Notes, Cheques, and Negotiable Securities, 9th ed. London:Stevens & Sons, 1927. Chalmers, M. D. “Vagliano’s Case” (1891), 7 L.Q.R. 216. Comment. “The Fictitious Payee and the UCC — The Demise of a Ghost” (1951), 18 U. Chicago L. Rev. 281. Craies, William Feilden.

A Treatise on Statute Law, 4th ed. by Walter S. Scott. London: Sweet & Maxwell, 1936. Crawford and Falconbridge, Banking and Bills of Exchange: A Treatise on the Law of Banks, Banking, Bills of Exchange and thePayment System in Canada, vol. 2, 8th ed. by Bradley Crawford. Toronto: Canada Law Book, 1986. Crawford, Bradley. The Law of Banking and Payment in Canada, vol. 3. Aurora, Ont.: Canada Law Book, 2008 (loose-leaf updated2017, release 22). Falconbridge on Banking and Bills of Exchange, 7th ed. by Arthur W. Rogers. Toronto: Canada Law Book, 1969. Falconbridge, John Delatre.

Banking and Bills of Exchange, 6th ed. Toronto: Canada Law Book, 1956. Geva, Benjamin. “Conversion of Unissued Cheques and the Fictitious or Non-Existing Payee — Boma v. CIBC” (1997), 28 Can. Bus.L.J. 177. Geva, Benjamin. “The Fictitious Payee After Teva v. BMO: Has the Pendulum Swung Back Far Enough?” (2016), 31 B.F.L.R. 607. Geva, Benjamin. “The Fictitious Payee and Payroll Padding: Royal Bank of Canada v. Concrete Column Clamps

(1961) Ltd.” (1978), 2Can. Bus. L.J. 418. Geva, Benjamin. “The Fictitious Payee Strikes Again: The Continuing Misadventures of BEA s. 20(5)” (2015), 30 B.F.L.R. 573. Holden, J. Milnes. The History of Negotiable Instruments in English Law. London: Athlone Press, 1955. Mohamed, Munaf, and Jordan McJannet. “The Employer, the Bank, and the Fraudster: Vicarious Liability and Boma Manufacturing Ltd.v. CIBC” (2005), 20 B.F.L.R. 465.

Ogilvie, M. H. “The Tort of Conversion and the Collecting Bank: Teva Canada Ltd. v. Bank of Nova Scotia” (2012), 91 Can. Bar Rev.733. Rafferty, Nicholas, and Jonnette Watson Hamilton. “Is the Collecting Bank now the Insurer of a Cheque’s Drawer against Losses Causedby the Fraud of the Drawer’s Own Employee?” (2005), 20 B.F.L.R. 427. Rogers, James Steven. The Early History of the Law of Bills and Notes: A Study of the Origins of Anglo-American Commercial Law.Cambridge: Cambridge University Press, 1995. Sullivan, Ruth. Sullivan on the Construction of Statutes, 6th ed. Markham, Ont.: LexisNexis, 2014.

APPEAL from a judgment of the Ontario Court of Appeal (Weiler, Laskin and Cronk JJ.A.), 2016 ONCA 94, 129 O.R. (3d)1, 344 O.A.C. 344, 52 B.L.R. (5th) 171, 394 D.L.R. (4th) 298, [2016] O.J. No. 581 (QL), 2016 CarswellOnt 1483 (WL Can.), settingaside a decision of Whitaker J., 2014 ONSC 828, [2014] O.J. No. 799 (QL), 2014 CarswellOnt 1955 (WL Can.). Appeal allowed,McLachlin C.J. and Wagner, Côté and Rowe JJ. dissenting. Colby Linthwaite, Fred Tayar and Daniel Baum, for the appellant. Frank J. McLaughlin, Paul Steep and Shanique M. Lake, for the respondent TD Canada Trust.

Martin Sclisizzi, Caitlin Sainsbury and Heather Pessione, for the respondent the Bank of Nova Scotia. Irwin I. Liebman and Moe F. Liebman, for the intervener. The judgment of Abella, Moldaver, Karakatsanis, Gascon and Brown JJ. was delivered by [1] Abella J. — A pharmaceutical company was the victim of a fraudulent cheque scheme implemented by one of itsemployees. It claimed that the collecting banks involved in negotiating the fraudulent cheques are liable for conversion.

Under s. 20(5) of the Bills of Exchange Act,[1] it is a defence to the tort of conversion if cheques are made out to fictitious or non-existing payees. [2] The banks argued that the payees in this case were fictitious or non-existing and that they were not, as a result,liable for conversion. [3] The tort of conversion involves the wrongful interference with the goods of another. Where a collecting bank paysout on a forged endorsement, it will be liable for conversion. Conversion is a strict liability tort. As a result, a bank may be held liablewhether or not it was negligent.

Any alleged contributory negligence on the part of the drawer is, as a result, also irrelevant. [4] Liability for conversion can be avoided if a bank can bring itself within s. 20(5) of the Act, which states: Fictitious payee

(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. [5] This Court explained the implications of s. 20(5) in Boma Manufacturing Ltd. v. Canadian Imperial Bank ofCommerce, (SCC), [1996] 3 S.C.R. 727, as follows: [Section 20(5)] provides that, where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. Thesignificance of a cheque that is payable to bearer, rather than to order, is that it can be negotiated by simple “delivery” to the bank;endorsement is not required.

The presence or absence of a legitimate or forged endorsement is irrelevant to a bearer cheque. A bankbecomes the lawful holder of a bearer cheque simply through delivery. By contrast, in order for a bank to become the lawful holder of acheque that is payable to order, not only must the cheque be delivered to effect negotiation, but the cheque must also be endorsed.

If thecheques in question were payable to fictitious persons, and could accordingly be treated as bearer cheques, the bank would become a“holder in due course” pursuant to s. 73 of the Act despite the forged endorsements and the missing endorsements; to repeat, negotiationof a bearer cheque is achieved simply by delivery. [para. 45] [6] In other words, when a bank transfers funds to an “improper” recipient, it is liable under the strict liability tort ofconversion unless a statutory defence succeeds.

And the statutory defence in s. 20(5) operates by rendering the impugned cheque“payable to bearer”, such that mere delivery — without endorsement — effects negotiation. The cheque would otherwise be “payable toorder”, require an endorsement, and, without such endorsement, be wrongly converted by the bank. [7] This Court has also, in multiple decisions, provided what is, in essence, a two-step framework which outlines whata bank must prove to demonstrate that a payee is fictitious or non-existing. Step one — the subjective fictitious payee inquiry — askswhether the drawer intends to pay the payee.

If the bank proves that the drawer lacked such intent, then the payee is fictitious, theanalysis ends and the drawer is liable. If the bank does not prove that the drawer lacked such intent, then the payee is not fictitious, andthe analysis proceeds to step two. Step two — the objective non-existing payee inquiry — asks if the payee is either (1) a legitimatepayee of the drawer; or (2) a payee who could reasonably be mistaken for a legitimate payee of the drawer. If neither of these is satisfied,then the payee does not exist, and the drawer is liable.

If either is satisfied, then the payee exists, and the bank is liable. [8] It is accepted that Teva did not participate in the fraud. It follows that none of the payees were fictitious. Further,all payees were either (1) known customers of Teva’s; or (2) companies whose names could reasonably have been mistaken for its actualcustomers, such that all payees existed. In my respectful view, therefore, and based on this Court’s jurisprudence, none of the payees inthis case were either fictitious or non-existing. As a result, the defence in s. 20(5) does not apply and the banks are liable for conversion.

Background [9] Neil Kennedy McConachie was Teva Canada Limited’s Finance Manager. He implemented a fraudulent schemewhich involved drafting false cheque requisition forms for business entities with similar or identical names to those of Teva’s realcustomers. Based on McConachie’s fraudulent forms, Teva’s accounts payable department issued the cheques and mechanically appliedthe requisite signatures. McConachie registered the business names as sole proprietorships and opened bank accounts at several banks,including the Bank of Montreal, Bank of Nova Scotia and TD Canada Trust.

He deposited 63 fraudulent cheques totaling $5,483,249.40into these accounts and eventually removed the funds. [10] The fraudulent cheques were made payable to payees with six different names. Two of those names, PCEPharmacare and Pharma Team System, resembled the names of existing customers to whom no debt was owed: PCE Management Inc.and Pharma Systems.

The four other names, Pharmachoice, London Drugs, Pharma Ed Advantage Inc. and Medical Pharmacies Group,were legitimate Teva customers to whom no debt was owed. [11] When Teva discovered the fraud in 2006, it fired McConachie. [12] In June 2007, Teva filed a claim against the collecting banks claiming that they were liable for conversion. [13] TD Canada Trust and Bank of Nova Scotia raised the following defences before the motions judge, Whitaker J.: • The cheques were made payable to either a non-existing entity or a fictitious entity, and therefore became payable to thebearer pursuant to s. 20(5) of the Bills of Exchange Act.

As bearer instruments, the cheques were properly delivered to the banks and noendorsement was required. • The cheques were deposited to the credit of the account holder, with the account holder being the named payee of thecheques, and the banks were holders in due course pursuant to s. 165(3) of the Bills of Exchange Act. No endorsements were thereforerequired. • The claim is statute-barred under the Ontario Limitations Act, 2002, S.O. 2002, c. 24, Sch.

B. [14] Only the banks’ first defence, based on s. 20(5) of the Bills of Exchange Act, is at issue in this appeal. [15] Whitaker J. found that the payees were not fictitious or non-existing within the meaning of s. 20(5) of the Act andthat there was “a rational basis for concluding that cheques were apparently made payable to existing clients” (2014 ONSC 828, at para.33 He also found that “the payees could plausibly be understood to be real entities and customers of the plaintiff” (para. 34).As a result, based on this Court’s decision in Boma and the Ontario Court of Appeal’s decision in Metroland Printing, Publishing andDistribution Ltd. v.

Canadian Imperial Bank of Commerce (2002), (ON CA), 158 O.A.C. 111, the banks could notrely on the defence in s. 20(5) of the Act and were ordered to pay Teva the full amount. [16] The Court of Appeal concluded that the motions judge erred in determining that the banks should bear the loss (2016ONCA 94 129 O.R. (3d) 1). It found that the two payees whose names were invented by McConachie — PCE Pharmacare andPharma Team System — were non-existing within the meaning of s. 20(5) of the Act. It also concluded that the four payees with namesidentical to existing customers of Teva were fictitious.

As a result, the banks were entitled to treat all the cheques as payable to bearer,and Teva’s action for conversion could not succeed. Analysis [17] The question at the heart of this case is which innocent party — Teva or the collecting banks — should bear the lossresulting from the fraud? [18] The Bills of Exchange Act does not define the terms “fictitious” or “non-existing”. As a result, the contours of theseterms have been left to the courts to determine.

It must fairly be acknowledged that in dealing with loss arising from cheque fraud, theapportionment between two innocent parties is inevitably challenging — and has often been challenged. Yet in my view, the policychoices made by this Court seem to me to strike the appropriate balance and assist in maintaining the efficiency and efficacy of the billsof exchange system. [19] It is helpful to set out the history that led to this Court’s

interpretation of s. 20(5). Section 20(5) of the Bills ofExchange Act, like most of the Act, was largely based on the U.K. Bills of Exchange Act, 1882, 45 & 46 Vict., c. 61. Section 7(3) of theU.K.

Act stated that “[w]here the payee is a fictitious or non-existing person the bill may be treated as payable to bearer.” This language,adopted in the Canadian legislation in 1890 (The Bills of Exchange Act, 1890, S.C. 1890, c. 33, s. 7(3)), has not been amended since. [20] Prior to the legislation, the common law rule with respect to fictitious and non-existing payees was articulated asfollows: In the hundred years that elapsed between the early English cases and the great codifications of negotiable instruments law, the rulewas generally accepted to be that “a bill payable to a fictitious person or his order is in effect a bill payable to bearer, and may bedeclared on as such, in favor of a bona fide holder . . . against all the parties knowing that the payee was a fictitious person.” [Footnoteomitted.] (Comment, “The Fictitious Payee and the UCC — The Demise of a Ghost” (1951), 18 U.

Chicago L. Rev. 281, at p. 282)

[21] Professor Benjamin Geva highlighted the rationale behind this rule: The pre-Act rationale of the fictitious payee rule, as stated in the case law, was estoppel against a party with knowledge of the fraud.That is, a drawer or acceptor who knew that the bill did not reflect a real transaction was estopped, usually as against a discounting bank,from raising a defence based on the forged endorsement of the payee whose name was inserted by the creator of the instrument by wayof pretense only in order to create a misleading appearance of real transactions between the drawer and acceptor, as well as between thedrawer and the payee. [Footnote omitted.] (“Conversion of Unissued Cheques and the Fictitious or Non-Existing Payee — Boma v.

CIBC” (1997), 28 Can. Bus. L.J. 177, at p. 194;see also J. S. Rogers, The Early History of the Law of Bills and Notes (1995), at pp. 223-49.) [22] The common law therefore weighted subjective considerations under the false payee defence: when a drawerknowingly made out a cheque to a fictitious or non-existent payee, therefore not intending that the cheque carry any commercial validity,the drawer was estopped from denying that the cheque be payable to its bearer. [23] After the enactment of the U.K.

Bills of Exchange Act, 1882, the terms “fictitious” and “non-existing” found in s.7(3) were interpreted and applied in four influential U.K. cases: Bank of England v. Vagliano Brothers, [1891] A.C. 107 (H.L.); Cluttonv. Attenborough & Son, [1897] A.C. 90 (H.L.); Vinden v. Hughes, [1905] 1 K.B. 795 (per Warrington J.); and North and South WalesBank Ltd. v. Macbeth, [1908] A.C. 137 (H.L.). [24] The House of Lords briefly departed from the common law requirement of knowledge in 1891 in Vagliano, where itheld that s. 7(3) of the U.K. Bills of Exchange Act had modified, not codified the common law.

Referring to the omission of any referenceto the drawer’s knowledge, the Earl of Selborne observed that “the omission must be taken to have been deliberate and intentional, andthat there is no sound principle on which what is so omitted can be supplied by construction” (p. 130). [25] This

interpretation of s. 7(3), however, did not last long. In 1905, in Vinden, Warrington J. refused to follow theobjective approach to “fictitious” and “non-existing” payees. The House of Lords itself rejected this approach in 1908 in Macbeth, whichreintroduced, with full force, the requirement of knowledge under s. 7(3). It has remained steadfastly in place for a century. [26] Based on these cases and Canadian jurisprudence such as Harley v. Bank of Toronto, (ON CA),[1938] 2 D.L.R. 135 (Ont. C.A.); Bank of Toronto v. Smith, (ON CA), [1950] 3 D.L.R. 169 (Ont. C.A.), and Banque deMontréal v.

Barbeau, [1963] B.R. 753 (Que. C.A.), Dean Falconbridge summarized the approach to fictitious and non-existing payees asfollows: Whether a named payee is non-existing is a simple question of fact, not depending on anyone’s intention. The question whether thepayee is fictitious depends upon the intention of the creator of the instrument, that is, the drawer of a bill or cheque or the maker of anote. In the case of a bill drawn by [the drawer] upon [the drawee] payable to [the payee], the payee may or may not be fictitious or non-existing according to the circumstances:

(1) If [the payee] is not the name of any real person known to [the drawer], but is merely that of a creature of the imagination, thepayee is non-existing and is probably also fictitious.

(2) If [the drawer] for some purpose of his own inserts as payee the name of [the payee], a real person who was known to him butwhom he knows to be dead, the payee is non-existing, but is not fictitious.

(3) If [the payee] is the name of a real person known to [the drawer], but [the drawer] names him as payee by way of pretence, notintending that he should receive payment, the payee is fictitious, but is not non-existing.

(4) If [the payee] is the name of a real person, intended by [the drawer] to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that [the drawer] has been induced to draw the bill by the fraud of some other person who has falselyrepresented to [the drawer] that there is a transaction in respect of which [the payee] is entitled to the sum mentioned in the bill. (Falconbridge on Banking and Bills of Exchange (7th ed. 1969), by A. W.

Rogers, at pp. 482-86) [27] This Court applied Falconbridge’s four propositions in the three appeals in which it considered s. 20(5): Fok CheongShing Investments Co. v. Bank of Nova Scotia, (SCC), [1982] 2 S.C.R. 488; Royal Bank of Canada v. Concrete ColumnClamps

(1961) Ltd., (SCC), [1977] 2 S.C.R. 456; and Boma in 1996. [28] In Fok Cheong, a case dealing with whether the payee was “fictitious”, the president of a company, Chan, made out

a cheque payable to one of the company’s creditors, Looing Weir, never intending that she receive the funds. Chan fraudulently endorsed the cheque in her name and appropriated the funds. In attempting to recoup its losses against the bank, the company argued that the cheque was not payable to bearer because the payee was not fictitious within the meaning of s. 21(5) (subsequently changed to s. 20(5) ) of the Bills of Exchange Act ).

The company stressed that the payee was a real person to whom the company owed a real debt. [ 29 ] This Court nevertheless found that the payee was fictitious, concluding that the cheque in question was from the very outset intended not to be cashed by the payee but rather that it should through a cleverly designed forgery be so negotiated as to be payable to the drawer himself. [p. 490] The finding of fraudulent intent on the part of the drawer, the president of the company, was held to be sufficient to conclude that the payee of the cheque was fictitious.

The bank was therefore entitled to treat the cheque as payable to bearer. [ 30 ] In arriving at its conclusion, this Court applied the rationale articulated in Vagliano , where Lord Herschell said: . . . whenever the name inserted as that of the payee is so inserted by way of pretence merely, without any intention that payment shall only be made in conformity therewith, the payee is a fictitious person within the meaning of the statute, whether the name be that of an existing person, or of one who has no existence, and that the bill may, in each case, be treated by a lawful holder as payable to bearer. [p. 153] (Cited in Fok Cheong , at p. 490.) [ 31 ] This Court next considered the meaning of “fictitious payee” in Concrete Column .

An employee of Concrete Column prepared over 1,000 cheques made payable to two sets of payees who were not entitled to them: individuals whose names came from unknown sources; and individuals employed by Concrete Column but to whom no money was owed. An authorized officer mechanically signed a large number of cheques that included the disputed ones. The dishonest employee took the cheques to the bank and received the amounts stipulated on them. When Concrete Column attempted to recover the lost amount from its bank, the bank invoked what is now s. 20(5) and argued that the payees were non-existing or fictitious.

It was therefore entitled to treat the cheques as payable to bearer. [ 32 ] The first set of payees, the imaginary ones, who were not known to Concrete Column, were found to be “non- existing” by the trial judge. Based on existing jurisprudence, the trial judge found that the question of whether a payee is non-existing was to be assessed as a question of fact, without regard to the intent of the drawer. As a result, he held that because the payees were not known to the drawer, they were non-existing.

The cheques made out to this set of individuals were therefore payable to bearer, and the claim against the bank for those cheques was dismissed. This finding was not appealed. [ 33 ] With respect to the second set of payees — workers who had been employed by Concrete Column but to whom nothing was owed for the relevant pay period, the trial judge found that the payees were not fictitious. The bank was therefore liable for conversion for this set of cheques.

The Court of Appeal upheld the trial judge. [ 34 ] In this Court, Pigeon J., writing for the majority, upheld the trial judge’s conclusion that the employees were not fictitious, relying on the fourth Falconbridge proposition, which, as previously noted, states: If [the payee] is the name of a real person, intended by [the drawer] to receive payment, the payee is neither fictitious nor non- existing, notwithstanding that [the drawer] has been induced to draw the bill by the fraud of some other person who has falsely represented to [the drawer] that there is a transaction in respect of which [the payee] is entitled to the sum mentioned in the bill. [ 35 ] Pigeon J. dismissed the bank’s argument that the authorized signing officer could not have formed an intention to pay the payees because he signed the cheques mechanically: Counsel for the appellant maintained that in the case at bar, where the person authorized to sign the cheques did mechanically place his signature on a large quantity of cheques without knowing any of the payees personally, it is not possible to apply the same rule as when a cheque is signed relying on an explicit false declaration, as it was in most of the cases which gave rise to the above-mentioned decisions.

I cannot see any valid reason for making such a distinction. On the contrary, in an age when cheques are processed by computer, it is even more necessary to avoid facilitating fraudulent operations. [p. 484] Though the drawer mechanically placed his signature on a large quantity of cheques, the Court attributed to the drawer an intention to pay the named payee. Or, phrased in terms of the governing legal framework, the bank bears the burden of proving that the drawer participated in the fraud. The drawer need not prove the opposite, i.e. that it formed an intention to pay any signed cheque to the intended payee.

In this way, the drawer could be said to benefit from a presumed intent to pay its cheques. But, it is worth emphasizing, it is ultimately the bank who must prove fraudulent intent to rely on the defence in s. 20(5) . [ 36 ] In holding the bank liable for the losses, Pigeon J. invoked the following rationale: By making banks responsible for cheques cashed on a false endorsement, our Bills of Exchange Act certainly has the effect of making it more difficult to cash a cheque fraudulently.

It is common knowledge that as a result, public agencies and private enterprises rely heavily on the responsibility of those who pay the cheques they issue, to counteract all kinds of fraud and at the same time to protect those for whom the payments are intended. [p. 484] [ 37 ] In dissent, Spence J. would have allowed the appeal. He found that the intent of the dishonest employee should be determinative, rather than that of Concrete Column.

He noted that the dishonest employee had “never intended that any of the persons named should receive the amount of the cheque in his name” (p. 487) and that the bank, as a result, was not liable.

[ 38 ] Laskin C.J., also in dissent, would have allowed the appeal on the basis that the payees were fictitious. Since “the cheques presented for signature to the signing officer were signed in batches without verification” (p. 481), the signing officer could not have formed an intention to pay the payees.

He disagreed with the trial judge’s finding that “some of the payees were known to the drawer as being former employees to whom payment was intended” because this “can only be taken as a post facto conclusion arrived at by an examination of the cheques after the forgeries were discovered” (pp. 481-82). [ 39 ] In Boma , this Court’s most recent consideration of s. 20(5), the Court clarified the meaning of both “fictitious” and “non-existing”, explained the purpose of the fictitious payee rule and clarified whose intention was relevant when considering the s. 20(5) defence. [ 40 ] The factual background in Boma was that a bookkeeper, Donna Alm, who was a duly authorized signing officer for two related companies, Boma Manufacturing Ltd. and Panabo Sales Ltd., arranged for the issuance of 155 fraudulent cheques.

She signed 146 of them, and arranged to have Boris Mange, a director and officer of both companies, who was not involved in the fraud, sign 9 of them. A number of the fraudulent cheques were payable to Boris Mange and his wife Ursula, or to existing employees of the companies. Almost all of the remaining 114 cheques were payable to a “J. Lam” or “J. R. Lam”, a name that resembled that of a subcontractor used by the companies, Van Sang Lam. Alm deposited all 155 cheques totalling $91,289.54 into one of her accounts at Canadian Imperial Bank of Commerce.

Many of the cheques were accepted by CIBC for deposit without endorsement, while others bore the forged endorsement of the payee. [ 41 ] The two companies sought to recover the $91,289.54 from CIBC. The bank argued that the payees were fictitious or non-existing pursuant to s. 20(5). This Court found that they were neither. Consequently, the defence did not apply. [ 42 ] Iacobucci J., writing for the majority, cited the four Falconbridge propositions as defining.

He noted that the policy rationale underlying s. 20(5) was that “if a drawer has drawn a cheque payable to order, not intending that the payee receive payment, the drawer loses, by his or her conduct, the right to the protections afforded to a bill payable to order” (para. 46). [ 43 ] The question was whose intention was relevant for the purposes of applying the rule: Alm, the dishonest bookkeeper, or Boris Mange, the guiding mind of the drawer companies who knew nothing of the fraudulent scheme? [ 44 ] The Court found that it was the intention of Boris Mange, as drawer, which was significant for the purpose of s. 20(5), not that of the bookkeeper.

As Iacobucci J. observed: To my mind, it is quite evident that it is the intention of the drawer, in the sense of the entity from whose account the cheques will be drawn, that is of relevance. In some cases, it may be that the signatory is effectively also the drawer. But in this case, however, this is not so. . . . . . . It is the intention of the drawer that is significant for the purpose of s. 20(5), not the intention of the signatory of the cheque. While a “drawer” is often defined to mean “[t]he person who signs or makes a bill of exchange” (cf.

The Dictionary of Canadian Law (2nd ed. 1995)), in my view, it is important in the circumstances of this case to distinguish between the signatory and the drawer. The drawer, in this case, is the entity out of whose bank account the cheques were drawn, that is, the appellant companies. Alm was not the drawer, but was simply the signatory. Thus, it is the intention of the appellant companies, as the drawer, that must be determined.

In my view, it is wrong to conclude that Alm, as an authorized signing officer of the appellants, could somehow be taken as expressing the intention of the appellant drawer. [paras. 55 and 58] [ 45 ] In the absence of a challenge to the validity of the cheques, it must be presumed that the drawer intended the payees to receive the proceeds of the cheques: The validity of the cheques is not challenged; therefore, it must be presumed that the drawer intended the payees to receive the proceeds of the cheques.

Clearly, the appellants had no intention of transferring over $90,000 to Alm, rather than the payees, for no reason and via the circuitous route of third party cheques. [para. 57] The intention, in other words, is attributed .

Again, it is the bank, not the drawer, who bears the burden of proving the drawer’s participation in the fraud under the fictitious payee inquiry. [ 46 ] With respect to the cheques written to Boris or Ursula Mange, or to employees of the corporations, that is, to real persons known to the companies (i.e. existing payees), the Court relied on the fourth Falconbridge proposition applied by the Court in Concrete Column , and also held that the cheques were not payable to fictitious persons. It could not be demonstrated that the drawer had placed the names there by way of pretence.

As the payees were neither fictitious nor non-existing, the cheques were therefore payable to order and the bank was liable in conversion. [ 47 ] With respect to the cheques written to “J. Lam” and “J. R.

Lam”, individuals who were unknown to the drawer, Iacobucci J. accepted — pursuant to Falconbridge’s first proposition — that these payees were technically non-existing, and that the cheques would, as a result, normally be considered payable to bearer. [ 48 ] But Iacobucci J. concluded that when the name of a payee can reasonably be mistaken for the name of a real person known to the drawer, the payee can be considered under the fourth Falconbridge proposition: Many of the cheques, however, were made payable not to actual persons associated with the companies, but to “J. Lam” and “J. R.

Lam”. The appellants had no dealings with any persons of such names. According to the criteria set out in Falconbridge . . . such aperson would be categorized as “non-existing”, and hence, fictitious. But in my view, it seems that Boris Mange was reasonablymistaken in thinking that “J. Lam” or “J. R. Lam” was an individual associated with his companies. Mange knew that one of thesubcontractors retained by the companies was a “Mr. Lam”. He did not specifically recall Lam’s first name, which, incidentally, wasVan Sang. However, when Mange approved the cheques to “J. Lam” and “J. R.

Lam”, he honestly believed that the cheques were beingmade out for an existing obligation to a real person known to the companies. The trial judge’s comments in this regard were tantamountto a finding of fact, and were not disturbed on appeal; as these are concurrent findings of fact, this Court should not intervene. Accordingly, the cheques made out to “J. Lam” and “J. R. Lam” also fall within the fourth category, and could not be treated by theCIBC as payable to bearer. Rather, the cheques were payable to order, and in order to be negotiable to the bank, delivery alone was notsufficient.

Valid, non-forged endorsements were required. [paras. 60-61] [49] The Court conducted an objective analysis. Although Mr. Mange only reviewed and signed 6 of the 114 chequespayable to J. Lam or J. R. Lam, since “J. Lam” and “J. R. Lam” closely resembled the name of a subcontractor known to and used by thecompanies, the Court concluded that an intention to pay should be attributed to all 114 cheques. This led to the conclusion that thepayees were neither non-existing nor fictitious. Notably, Mr. Mange’s partial review of the cheques was not material to the legaloutcome.

Rather, the proximity between the payee’s name (“J. Lam” and “J. R. Lam”) and the name of a true payee (“V. S.

Lam”) wasdispositive. [50] Iacobucci J. also emphatically rejected the bank’s argument that the drawer’s negligence should be taken intoconsideration when apportioning liability: . . . the notion of strict liability involved in an action for conversion is prima facie antithetical to the concept of contributory negligence.[para. 32] In his view, “[i]f the contributory negligence approach is to be introduced into this area of the law, I would leave that innovation toParliament” (para. 35). [51] The state of the law as can be seen from this history has treated “fictitious” and “non-existing” as two distinctnotions.

A payee is fictitious when the drawer does not intend to pay the payee, meaning that the payee’s name is inserted by way ofpretence only.

The underlying rationale behind the fictitious payee rule is that if the drawer did not intend that the payee receivepayment, such as in cases of fraud, the drawer should not be able to recover from the bank: The policy underlying the fictitious person rule seems to be that if a drawer has drawn a cheque payable to order, not intending that thepayee receive payment, the drawer loses, by his or her conduct, the right to the protections afforded to a bill payable to order. (Boma, at para. 46; see also Fok Cheong.) [52] As a result, if the drawer does not intend to pay the payee, the payee will be fictitious, the cheque will be payable tobearer, and the banks will be able to rely on the defence in s. 20(5) (Fok Cheong).

In this sense, the fictitious payee analysis issubjective. But a specific intention to pay the payee need not be given by the drawer for any cheque (Concrete Column, Boma). Intent topay is presumed or attributed. [53] This approach is sensitive to commercial realities. Attributing an intention to pay recognizes that, particularly in alarge corporation, a specific intention by the guiding mind(

s) of the corporation is not directed to each individual cheque. To require suchan intention would ignore the realities of the cheque-issuing process in many organizations.

As Pigeon J. noted in Concrete Column: Counsel for the appellant maintained that in the case at bar, where the person authorized to sign the cheques did mechanically placehis signature on a large quantity of cheques without knowing any of the payees personally, it is not possible to apply the same rule aswhen a cheque is signed relying on an explicit false declaration, as it was in most of the cases which gave rise to the above-mentioneddecisions. I cannot see any valid reason for making such a distinction.

On the contrary, in an age when cheques are processed bycomputer, it is even more necessary to avoid facilitating fraudulent operations. [p. 484] [54] As for non-existing payees, the jurisprudence traditionally determined whether a payee was non-existing from afactual perspective, regardless of an intent to pay. Falconbridge wrote that “[w]hether a named payee is non-existing is a simple questionof fact, not depending on anyone’s intention.” In Fix Fast Ltd. v. Royal Bank of Canada, Que. Sup.

Ct., No. 681,011, May 21, 1970, forexample, the trial judgment which was appealed ultimately to this Court in Concrete Column, the Superior Court found that payees wholacked an established relationship with the drawer were non-existing. These included payees whose names may have existed only in theimagination of the fraudulent employee, were taken from a phone directory, or were the names of persons the fraudulent employee mighthave known some way.

The Superior Court assessed the notion of non-existing payee based on whether there was a relationship betweenthe payee and the drawer that could possibly give rise to a debt owed to the payee. The Superior Court’s finding with respect to non-existing payees was not under appeal in this Court. [55] In Boma, this Court modified the approach to non-existing payees slightly by finding that the payee was not non-existing in cases where the drawer could reasonably have mistaken the payee for a payee with an established relationship with thedrawer.

This was an objective assessment. [56] As a result, according to Boma, a payee will be non-existing when the payee lacks an established relationship withthe drawer, unless the drawer could reasonably have mistaken the payee to be one with such a relationship (Boma, at para. 60; MetrolandPrinting, Publishing & Distribution Ltd. v. Canadian Imperial Bank of Commerce (2001), (ON SC), 14 B.L.R. (3d)

212 (Ont. S.C.J.)). [57] Therefore, under the non-existing payee rule a cheque payable, for example, to “Snow White”, a payee the drawercould not reasonably have mistaken for a plausible payee, will be considered payable to bearer. A payee may therefore be non-existingwithout necessarily being fictitious. [58] That is the current state of the law. Unlike my colleagues, I see no reason to create a new version of the false payeedefence whereby a payee would be “fictitious” when there is no real underlying transaction or debt. This overrules this Court’s decisionin Concrete Column, and its confirmation in Boma.

It also nullifies Iacobucci J.’s approach to “non-existent” payees in Boma andreplaces it with an approach whereby a payee reasonably mistaken by the drawer for a payee with an established relationship would beconsidered fictitious on the basis that any payee who is not factually real cannot have an underlying transaction with the drawer. A payeewould therefore only be deemed “non-existent” when the payee does not in fact exist at the time the cheque is drawn.

This means thatonly in rare cases would there be liability for the banks, namely where the converted cheque is drawn to the order of a real personentitled to the proceeds. [59] This Court’s

interpretation of “fictitious” payees as incorporating a subjective standard is deeply rooted in thecommon law, which s. 20(5) of the Act was intended to codify. When enacted in 1882, the U.K. Bills of Exchange Act bore the title “AnAct to codify the law relating to Bills of Exchange, Cheques, and Promissory Notes” and its drafter reported that his aim in drafting thelanguage of s. 7(3) “was to reproduce as exactly as possible the existing law, whether it seemed good, bad, or indifferent in its effects”(B. Crawford, Q.C., The Law of Banking and Payment in Canada (loose-leaf), vol. 3, at p. 21-30.3, citing M. D.

Chalmers, A Digest ofthe Law of Bills of Exchange, Promissory Notes & Cheques (3rd ed. 1887), at p. xxxvi).

In fact, an earlier draft of the legislationexpressly required the drawer’s knowledge of the fraud: When the payee is a fictitious or non-existing person, no person shall be capable of making title to, or enforcing payment of theinstrument, provided that, when a bill has knowingly been drawn payable to a fictitious or non-existing person and purports to bear hisendorsement, it shall be valid for all purposes in the hands of a holder in due course, and a holder with notice may enforce it against thedrawer or any endorser thereof, or against the acceptor if, when he accepted, he was aware of the facts. [Emphasis added; emphasis inoriginal deleted.] (Crawford, at p. 22-35, quoting M.

D. Chalmers, “Vagliano’s Case” (1891), 7 L.Q.R. 216, at p. 220.) [60] A broadly worded provision was ultimately preferred in committee to ensure that s. 7(3), as enacted, would reflectthe state of the common law (J. D. Falconbridge, Banking and Bills of Exchange (6th ed. 1956), at pp. 462-63; Chalmers (1891), at pp.220-21). To guarantee the continuity of the common law, s. 97(2) of the U.K.

Bills of Exchanges Act provided that “[t]he rules ofcommon law including the law merchant, save in so far as they are inconsistent with the express provisions of this Act, shall continue toapply to bills of exchange, promissory notes, and cheques.” [61] By including s. 9 of the Act, which reproduced the exact wording of s. 97(2), Parliament ensured that the rules ofcommon law were also maintained in Canada “save in so far as they are inconsistent with the express provisions of this Act”.

It followsthat in enacting s. 20(5), Parliament intended to codify the common law false payee defence, including subjective considerations. Itequally follows that my colleagues’ purely objective inquiry can only be justified if the express language in s. 20(5) ousted thosesubjective considerations. No such ousting language exists, nor do my colleagues offer an interpretive analysis based on the language ofthe provision (R.

Sullivan, Sullivan on the Construction of Statutes (6th ed. 2014), at pp. 537-41 and 543-44). [62] The concerns behind the enactment of s. 20(5) of the Act, and s. 7(3) in the United Kingdom, arose in the context ofestoppel, of which knowledge is an essential component. A drawer who knowingly drew a cheque to a fictitious or non-existent payeewas estopped from denying that the cheque was payable to its bearer.

The same result is reached in conversion today: where a drawerdoes not intend that a cheque carry commercial validity, the bank does not act without the drawer’s authority where it pays the cheque tobearer rather than to order. In either case, it was never the drawer’s intention for the named payee to receive the proceeds of the chequein the first place. Paying proceeds to bearer cannot, therefore, be inconsistent with the authority given to the bank. [63] The case of Vagliano, on which my colleagues rely so heavily, offers no basis for concluding that the common lawwas changed by s. 20(5).

It bears repeating that Vagliano survived for less than 20 years before it was categorically rejected by theHouse of Lords in 1908. It is difficult to see any basis for resuscitating it now. [64] Moreover, and contrary to my colleagues’ assertion, Dean Falconbridge’s fourth proposition was not intended toaccord with the facts and outcome in Vagliano. His original articulation of the four propositions came in the wake of the House of Lords’decision in Macbeth, which reintroduced the requirement of knowledge in s. 7(3).

As previously noted, the fourth proposition addressesthe situation whereby if the payee is a real person intended by the drawer to receive payment, the payee is neither fictitious nor non-existing, regardless of whether the drawer was induced by fraud to draw the cheque. These were the circumstances in Macbeth where theplaintiff was induced by the fraud of Mr. White to draw a cheque in favour of one T. A.

Kerr, an existing person, whom the plaintiff hadintended would receive the proceeds. [65] Given this history, and before this Court jettisons a whole line of jurisprudence only to return to an olderjurisprudence that has been consistently rejected since 1905, great care should be taken. This is not an argument for jurisprudentialstagnation, but for a recognition that the public relies on our disciplined ability to respect precedent. There is no doubt that ourjurisprudence on s. 20(5) has its critics. But as the Court noted in Canada v.

Craig, 2012 SCC 43 [2012] 2 S.C.R. 489, tooverrule its own decisions “the Court must be satisfied based on compelling reasons that the precedent was wrongly decided and shouldbe overruled” (para. 25). All this to ensure certainty, consistency and institutional legitimacy (para. 27). I do not share the view that such“compelling reasons” exist in this case. [66] Nor is the fact that there are dissenting opinions, on its own, a basis for overruling a precedent. Dissenting opinions

are a useful way to see a different way of approaching the case, but they are the views that a majority rejected. Again, unless compellingreasons emerge to vitalize their validity and cogently demonstrate the wrongness of the majority’s view, that view continues to prevail. [67] Boma and Concrete Column have together served the commercial world for 40 years without serious complaint fromthat world. There is no evidence that the jurisprudence on fictitious and non-existing payees reflects unsound public policy on theallocation of risk.

Banks are well-situated to handle the losses arising from fraudulent cheques, allowing those losses to be distributedamong users, rather than by potentially bankrupting individuals or small businesses which are the victims of fraud. As Bray J. observedin the early case of Kepitigalla Rubber Estates, Ltd. v.

National Bank of India, Ltd., [1909] 2 K.B. 1010, at p. 1026, “[t]o the individualcustomer the loss would often be very serious; to the banker it is negligible.” [68] The Court in Boma weighed these policies and concluded, as did the Court in Concrete Column, that the Act shouldbe interpreted in such a way that drawers and banks are exposed to the risks created by the fraudulent use of the system, but as noted byIacobucci J., the banks are the more significant beneficiaries of the bills of exchange system.

It is therefore appropriate, in certaincircumstances, for them to bear risks and losses associated with that system: To some, the allocation of risk in the bills of exchange system may seem arbitrary, but in my view a necessary and coherent rationalesustains this allocation. With respect to forged endorsements, for example, no party in particular is in any better position to detect thefraud than any other. It is a risk that all parties must bear, including collecting banks.

It is a price that must be paid if one wishes toenjoy the significant benefits of the bills of exchange scheme, not the least of which is, from the bank’s perspective, the facilitation ofhuge numbers of financial dealings conducted rapidly, and without overwhelming transaction costs.

While the banks are accorded theimportant advantage of holder in due course status in many situations, it would not be appropriate . . . to exempt any party, includingcollecting banks, from all exposure to the risk and consequence of fraud. [para. 80] [69] Moreover, and significantly, to allocate losses to the drawer for having failed to identify and detect the fraud isinconsistent with strict liability. Conversion is a strict liability tort. This makes any negligence on the part of the drawer or the banks inpreventing the fraud irrelevant.

The question therefore is which of two innocent parties should bear the loss occasioned by fraud and not,as my colleagues suggest, who is more at fault? [70] It is true that the dissent in Boma preferred a different approach, one that warned that “allocating the loss to theaccepting bank would create a situation where the bank would be required to verify the validity of every single cheque it receivesinvolving a corporate drawer” (para. 97).

From this, and without any evidentiary support, my colleagues conclude that the current systemis too burdensome on the banks and assert that, as a result, losses resulting from fraud ought to be reallocated to the drawer exclusively. Revisiting the same policy arguments advanced, weighed and ultimately rejected by the Court in prior cases does not, by itself, warrantjudicial reconsideration of this Court’s decisions (see e.g. Boma majority, at para. 80; Boma dissent, at paras. 95-97). [71] Negotiability is only one factor animating our bills of exchange system.

The assertion that cheques would berendered less easily negotiable because of this Court’s

interpretation of s. 20(5) is theoretical. Subjective factors have now been part ofthe law for decades in Canada and there is no suggestion that banks have not processed, or have had difficulty processing, chequesthroughout that period. If Parliament has concerns about the way this Court has balanced these complex policies, it is of course open to itto change the Act. Application [72] Since McConachie was not lawfully entitled to the cheques, the banks are prima facie liable for conversion, as theCourt of Appeal observed.

This is because they dealt with the cheques “under the direction of one not authorized”, and then made “theproceeds available to someone other than the person rightfully entitled to possession” (Crawford and Falconbridge, Banking and Bills ofExchange (8th ed. 1986), by B. Crawford, vol. 2, at p. 1386). [73] The issue then is whether the banks can rely on s. 20(5). This, in turn, depends on whether the six payees named onthe cheques are fictitious or non-existing. [74] In this case, Teva was not complicit in the fraud.

Though only four of the names used were those of existingcustomers, the other two names used were very similar to names of Teva’s real customers. The motions judge found that there was “arational basis for concluding that cheques were apparently made payable to existing clients”, and that “the payees could plausibly beunderstood to be real entities and customers of the plaintiff”. [75] As a result, the payees were not fictitious or non-existing. [76] I would therefore allow the appeal with costs and restore the decision of Whitaker J.

The reasons of McLachlin C.J. and Wagner, Côté and Rowe JJ. were delivered by [77] Côté and Rowe JJ. (dissenting) — Two innocent parties. Each asks that the other bear the loss occasioned by afraudster. Resolution of this appeal requires us to interpret the statutory defence to the tort of conversion found in s. 20(5) of the Bills ofExchange Act, R.S.C. 1985, c.

B-4 (“BEA”): Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. [78] A bank will be liable to an account holder in conversion if it deals with a cheque “under the direction of one notauthorized, by collecting it and making the proceeds available to someone other than the person rightfully entitled to possession” (BomaManufacturing Ltd. v. Canadian Imperial Bank of Commerce, (SCC), [1996] 3 S.C.R. 727, at para. 83).

This would bethe case, for example, where a cheque is drawn to the order of a real person entitled to the proceeds and the bank makes those proceedsavailable to some other person. Conversely, a bank will not be liable in conversion if it pays out on a cheque payable to bearer. A chequemay be treated as such if the payee is fictitious or non-existing, pursuant to s. 20(5) of the BEA.

[79] This appeal turns on the meaning this Court gives to the terms “fictitious” and “non-existing”. Our colleague JusticeAbella adopts a subjective approach to the

interpretation of these two terms: a payee will be fictitious if the drawer did not intend tomake the payment to the payee, and will be non-existing if the payee is neither a legitimate payee of the drawer, nor one that the drawerreasonably but mistakenly believes is a legitimate payee. In our view, the focus placed on subjective intentions and the existence ofreasonable beliefs in the mind of the drawer brings uncertainty to Canada’s negotiable instruments and payment system. [80] We therefore propose a simplified, objective approach to the

interpretation of s. 20(5). Under our approach, a payeewill be deemed “non-existing” where the payee does not in fact exist at the time the instrument is drawn. A payee will be “fictitious”where there is no real underlying transaction or debt ― that is, where the payee is not entitled to the proceeds of the cheque. [81] As we will explain, this objective approach has strong roots in the jurisprudence. An objective approach to “non-existing”, consistent with Clutton v. Attenborough & Son, [1897] A.C. 90 (H.L.), was taken consistently in Canada until Boma.

Anobjective approach to “fictitious” is consistent with the principles that emerged from the House of Lords’ decision in Bank of England v.Vagliano Brothers, [1891] A.C. 107. [82] Adopting our objective approach aligns with the purpose of the bills of exchange system by supporting negotiability,certainty, and finality of payment.

Policy considerations also buttress our approach since it fairly and effectively allocates risk andsimplifies the s. 20(5) analysis. [83] We recognize, however, that returning to an objective test for “non-existing” would require overturning this Court’sdecision in Boma, and that returning to an objective test for “fictitious” would require overruling this Court’s decision in Royal Bank ofCanada v. Concrete Column Clamps

(1961) Ltd., (SCC), [1977] 2 S.C.R. 456. Overturning precedent is not a step thatthis Court should undertake lightly (Canada v. Craig, 2012 SCC 43, [2012] 2 S.C.R. 489, at para. 24). Yet, as we will explain, we are ofthe view that such a step is warranted in the present case. I. Facts [84] We agree with our colleague’s exposition of the facts, set out at paras. 9-12 of her reasons. We add only thefollowing. First, two of the payees named on the cheques requisitioned by McConachie, PCE Pharmacare and Pharma Team System,were entities that did not in fact exist.

Second, the four other payees, Pharmachoice, London Drugs, Pharma Ed. Advantage Inc. andMedical Pharmacies Group, did in fact exist: they were or had been customers or providers of Teva. However, none of the chequesrequisitioned by McConachie to the order of these payees was for a legitimate debt owed by Teva. II. Analysis A. Proposed Approach to Section 20(5) [85] The first step in determining whether an instrument ought to be considered as payable to bearer under s. 20(5) of theBEA involves determining whether the payee is a non-existing person.

Under our objective approach, a payee will be non-existing wherethe payee does not in fact exist at the time the instrument is drawn (see B. Crawford, The Law of Banking and Payment in Canada(loose-leaf), vol. 3, at pp. 22-31 and 22-32). The non-existence of the payee obviously makes endorsement by this person impossible.Thus, such a cheque may be treated as payable to the bearer, providing the banks with a defence to the tort of conversion. [86] If the payee is an existing person, then a second inquiry is required: Is the payee fictitious?

As we will explain, thisstep has a troubled history in Canadian case law, but we are of the view that it can be rehabilitated as an appropriate allocator of risk andefficient arbiter of disputes. In our view, a payee will be fictitious where there is no real transaction between the drawer and the payee.By definition, or necessary implication, a payee who is non-existing is also fictitious (given that there can be no real transaction with aperson that does not exist). But a payee who is a real person can nevertheless be fictitious.

This is the case where the payee, despitebeing a real person, is not entitled to the proceeds of the cheque because there is no underlying transaction with the drawer. [87] For some time, an objective test to non-existence was applied by Canadian courts, following Clutton.Dean Falconbridge similarly stated that non-existence was a “simple question of fact, not depending on anyone’s intention” (J. D.Falconbridge, Banking and Bills of Exchange (6th ed. 1956), at pp. 468-69).

However, the majority’s decision in Boma changed this.Under the modification introduced by Justice Iacobucci, if a payee is factually non-existent, but the drawer plausibly thought the payeewas real, then the payee is not considered to be non-existent (Boma, at para. 60).

This subjective approach, which imports considerationsof the drawer’s belief, is affirmed by our colleague in her reasons. [88] The effect of our approach to “fictitiousness” is that the Boma subjective approach to “non-existing” will be moot.This is so because any payee who is not factually real, but was plausibly thought to be real by the drawer, could not in fact have had anunderlying transaction with the drawer. Thus, the bank will have a s. 20(5) defence under our objective approach to “fictitious”. [89] Our approach to “non-existent” and “fictitious” does away with all considerations of intent.

Where a cheque is drawnto the order of a person who does not in fact exist, or to the order of a person who exists but who is not entitled to the proceeds of thecheque, s. 20(5) will apply, regardless of the intent of the parties involved in the creation of the cheque. It does not matter that such asituation is the result of a deliberate choice, of an innocent mistake by the drawer, or, as is the case here, of fraud committed on thedrawer. [90] Our approach to s. 20(5) is not novel. Rather, it returns Canadian jurisprudence to the principles underlying theearliest

interpretation of s. 20(5). A careful examination of the case law reveals substantial support for our objective approach to both“non-existing” and “fictitious”, and brings to light the policy rationale for it. Starting with a review of the case law, we will show that thefirst Bills of Exchange Act, 1882 (U.K.), 45 & 46 Vict., c. 61, was interpreted objectively by the House of Lords such that “fictitious”meant that there was no underlying transaction. Unfortunately, their

interpretation was distorted and subsequently a subjective approachwas ― incorrectly, in our view ― adopted by Canadian courts. The case law also shows that an objective approach to “non-existing”was taken until recently. As we will then reveal, there is significant jurisprudential, purposive, and policy support for our proposed

homecoming. We will conclude by providing justification for overturning Concrete Column and Boma . B. Jurisprudential Support [ 91 ] Tracing the law from before the enactment of the first Bills of Exchange Act , through various

interpretations of s. 20(5) , reveals judicial precedent for an objective approach to determining non-existence and fictitiousness. Canadian jurisprudence has taken a different path by embracing a subjective approach which turns on the drawer’s intention.

(1) English Common Law Prior to the Bills of Exchange Act [ 92 ] Prior to legislative intervention, the common law in England treated as payable to bearer any bill made payable to obviously inanimate objects such as “cash”. For example, in Grant v.

Vaughan (1764), 3 Burr. 1516, 97 E.R. 957 , a bill worded “pay to ship ‘Fortune,’ or bearer” was found to be payable to the bearer, thus allowing an action for its payment: “If this bearer cannot bring an action upon it, no-body can: for as it is not made payable to any particular person by name, no action can be brought in the name of such particular person” (pp. 962-63). [ 93 ] The common law also addressed bills drawn in favour of imaginary, but realistically named, payees.

In a series of cases addressing such bills, courts held that the drawers and acceptors “who knew of the fictitious nature of the indorsement were estopped as against the plaintiff (a holder for value who had no notice of the circumstances) from setting up the fictitious character of the bill as a defence” ( Minet v. Gibson (1789), 1 R.R. 754, at p. 755; see also Tatlock v. Harris (1789), 3 T.R. 174, 100 E.R. 517 ). The defendants were liable to pay the bearer “generally on the ground that they were estopped to take advantage of their own fraud.

The judges felt that the defendants must have intended something by their actions in putting the bills into circulation” (Comment, “The Fictitious Payee and the UCC ― The Demise of a Ghost” (1951), 18 U. Chicago L. Rev. 281, at p. 282 (footnote omitted)). In other words, the parties who intended the fraud were required to honour the bills as payable to the bearer (Crawford, at p. 22-35).

(2) Interpretation of the British Bills of Exchange Act in Vagliano [ 94 ] Roughly 100 years later, the British Parliament enacted the first Bills of Exchange Act, 1882 . Section 7(3) of that Act contained language identical to today’s s. 20(5) of the BEA : “Where the payee is a fictitious or non-existing person the bill may be treated as payable to bearer.” [ 95 ] Interpreting the new legislation fell to the House of Lords in Vagliano . In that case, a clerk in service of Vagliano Brothers fraudulently prepared bills with the name of Vucina (a foreign associate of Vagliano) as drawer and C.

Petridi & Co. (a genuine supplier of Vagliano) as payee. The clerk used forged letters of advice so as to procure the genuine acceptance of Vagliano. He then forged the endorsement of C. Petridi, obtained payment of the bills at Vagliano’s bank, and absconded with the proceeds.

In a split decision, the Law Lords found in favour of the Bank of England by holding that the payee was fictitious and thus the bill was payable to the bearer. [ 96 ] An important issue raised in Vagliano was whether s. 7(3) of the Bills of Exchange Act, 1882 should be interpreted as importing the knowledge and intent requirement that existed at common law prior to the enactment of that statute.

Six of the eight Law Lords found that it should not. [ 97 ] A majority of the House of Lords affirmed that the Bills of Exchange Act, 1882 — a codifying statute — should not be construed in accordance with the common law that preceded it. This view was best captured by the following passage from Lord Herschell’s speech: . . . I cannot bring myself to think that this is the proper way to deal with such a statute as the Bills of Exchange Act , which was intended to be a code of the law relating to negotiable instruments.

I think the proper course is in the first instance to examine the language of the statute and to ask what is its natural meaning, uninfluenced by any considerations derived from the previous state of the law, and not to start with inquiring how the law previously stood, and then, assuming that it was probably intended to leave it unaltered, to see if the words of the enactment will bear an

interpretation in conformity with this view . [Emphasis added; pp. 144-45.] Lord Herschell’s interpretive approach was widely accepted and applied by various other courts, including Canadian courts interpreting the BEA (W. F. Craies, A Treatise on Statute Law (4th ed. 1936), at pp. 309-10; Crawford, at pp. 21.30.2 to 21.33). In fact, Sir Mackenzie Chalmers, who drafted the parliamentary bill that would later become the Bills of Exchange Act, 1882 , described it as “what appears to be the true canon for construing a codifying statute” (M. D.

Chalmers, “Vagliano’s Case” (1891), 7 L.Q.R. 216, at p. 220). [ 98 ] Focusing on the text of s. 7(3), Lord Halsbury L.C. stated that “construing the statute by adding to it words which are neither found therein nor for which authority could be found in the language of the statute itself, is to sin against one of the most familiar rules of construction” (p. 120). [ 99 ] This textual

interpretation also accords with the provision’s legislative history.

An earlier draft of s. 7(3) read as follows: When the payee is a fictitious or non-existing person, no person shall be capable of making title to, or enforcing payment of the instrument, provided that, when a bill has knowingly been drawn payable to a fictitious or non-existing person and purports to bear his endorsement, it shall be valid for all purposes in the hands of a holder in due course, and a holder with notice may enforce it against the drawer or any endorser thereof, or against the acceptor if, when he accepted, he was aware of the facts . [Emphasis added; emphasis in original deleted.] (Crawford, at p. 22-35, citing Chalmers, at p. 220.)

This draft was heavily amended in committee, however, and all references to the knowledge requirement that existed at common law were removed. Our colleague suggests that this was done to better reflect the state of the common law at the time. In our view, the authority cited for this proposition actually supports the opposite conclusion — that a court analyzing the legislativ

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