CITATION: Meridian Credit Union Limited v. Grenville-Wood Estate 2011 ONCA 512

DATE: 20110712

DOCKET: C51739

COURT OF APPEAL FOR ONTARIO

O’Connor A.C.J.O., Cronk and Rouleau JJ.A.

BETWEEN

Meridian Credit Union Limited

Plaintiff (Respondent)

and

(The Estate of) Geoffrey Grenville-Wood

Defendant (Appellant)

Paul Champ, for the appellant

Kelly Charlebois, for the respondent

Heard: July 5, 2011

On appeal from the judgment of Justice W.J. Loyd Brennan of the Superior Court of Justice dated January 19, 2010, with reasons reported at 2010 ONSC 485.[1]

By the Court:

[1]              This is an appeal from a judgment finding the appellant liable for a loss sustained by his bank when the appellant unknowingly deposited a materially altered cheque that was then dishonoured by the payor.

[2]              The appellant, the late Mr. Geoffrey Grenville-Wood, agreed to facilitate a transfer of funds on behalf of a Taiwanese businessman whom he did not know in return for a 5% commission on the transfer.  In accordance with this arrangement, the appellant received a cheque payable to him for $57,000.13 in March 2005.  He deposited $2,850 (representing his commission) into an existing account at the respondent credit union and the remaining $54,150.13 into another account he had just opened with the respondent.  As per the instructions he received from the Taiwanese businessman, the appellant ordered a wire transfer of $41,989.14 US to a company in Tokyo. 

[3]              In fact, the cheque was doctored.  It was drawn on the Royal Bank of Canada account of Polstar Construction Ltd., a corporation located in Brampton.  The cheque was originally made payable to DeMelo’s Construction in the amount of $355.12 but someone had altered the cheque to show the appellant as the payee in the amount of $57,000.13.

[4]              The alteration was discovered and the cheque was returned as dishonoured on June 9, 2005.  The respondent reimbursed the Royal Bank of Canada (the drawee bank) and then charged the amount back to the appellant.  The respondent seized $12,658.03 from the appellant’s accounts and brought an action against him for the balance of $44,342.10.  The appellant counterclaimed in negligence and breach of contract.  In his pleadings and during trial, the appellant argued that he was a victim of fraud who did not know that the cheque had been altered and so he should not be liable for the loss. 

[5]              The trial judge found that the cheque had been materially altered and, thus, that it was void. Although there was no suggestion that the appellant was complicit in the forgery, the respondent had the right of charge-back with respect to the materially altered cheque.  As a result, the respondent was entitled to reverse the “provisional credit” given to the appellant upon deposit of the fraudulent cheque, debit all the appellant’s accounts for the full amount of the fraudulent cheque, and bring an action for the unrecovered balance.  Although in his reasons the trial judge refers to the appellant’s claim in negligence, he provided no reasons for dismissing the claim.

[6]              The appellant argues that the trial judge erred in finding that there had only been a “provisional credit” made to the appellant’s account.  In the appellant’s view, the credit to his account had become final because payment on the cheque had been made to the respondent (the collecting bank) by the drawee bank.  The appellant argues that once a drawee bank has made the payment and the collecting bank has received the funds, the collecting bank’s right of charge-back is extinguished. 

[7]              In particular, The appellant submits that the Supreme Court of Canada’s decision in B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, [2009] 1 S.C.R. 504, stands for the proposition that, when the funds are paid to the collecting bank and the hold on a cheque is lifted, the credit to the account becomes final and the collecting bank’s right of charge-back is extinguished.  Thereafter, the respondent’s only remedy is to sue on the basis of mistake of fact.  In an action based on mistake of fact, the appellant can raise the defence of change of position, a defence that, according to the appellant, would succeed on the facts of this case.

[8]              We disagree.  In our view, B.M.P. has no application to the present case.  B.M.P. did not involve the collecting bank’s right of charge-back.  In B.M.P., the drawee bank had no recourse against the collecting bank, yet the collecting bank still voluntarily assisted the drawee bank in collecting the funds from the payee’s account. In defending the payee’s action, both banks relied on the payment having been made to the payee in mistake of fact.

[9]               The scenario in the present case is quite different.  The drawee bank dishonoured the cheque the appellant had deposited on the basis that it had been materially altered.  The drawee bank returned the cheque as dishonoured to the respondent.  The respondent then exercised its right of charge-back against the appellant’s account. 

[10]         Charge-back refers to a collecting bank’s common law right to reverse a credit made to a customer’s account because of some defect in the bill of exchange.  This right has been recognized by Canadian courts since at least the 1870s; see e.g. Owens v. The Quebec Bank (1870), 30 U.C.R. 382 (Q.B.).

[11]         Although many banks simply provide for this right in their contract with the customer, it appears that the respondent had not.  In Bank of Nova Scotia v. Sharp (1975), 57 D.L.R. (3d) 260 (B.C.C.A.), the British Columbia Court of Appeal confirmed that, even absent a provision in the bank’s agreement with its customer, the bank retained the right of charge-back as it was inherent in its role as a collecting bank.  A collecting bank “acts as a mere agent or conduit pipe to receive payment of the cheque from the banker on whom it is drawn [i.e. the drawee bank] and holds the proceeds at the disposal of his customer”: Sharp at p. 263, citing 2 Hals., 3rd ed., at pp. 176-8.

[12]         In our view, the fact that a collecting bank has received payment on a cheque from the drawee bank does not mean that the credit made to the payee’s account becomes final in the sense that the collecting bank loses its right of charge-back.  The collecting bank, in acting as the payee’s agent, assumes no liability with respect to the validity of the bill of exchange.  The collecting bank does not become a guarantor of the cheque by virtue of receiving the funds from the drawee bank and removing the hold on the payee’s account.  Although most reported cases involving charge-back are cases of NSF cheques where the collecting bank had not yet received the funds from the drawee bank, there are nonetheless numerous reported cases involving a dishonoured cheque and a charge-back by a collecting bank after the collecting bank had received payment from the drawee bank.  See e.g. National Slag v. Canadian Imperial Bank of Commerce et al. (1982), 140 D.L.R. (3d) 473 (Ont. H.C.), affirmed (1985), 19 D.L.R. (4th) 383 (Ont. C.A.); and Royal Bank of Canada v. Malfara Importing & Exporting Inc., [2005] O.J. No. 1066 (S.C.).

[13]         As stated by M.H. Ogilvie in her text, Bank and Customer Law in Canada (Toronto: Irwin Law, 2007), at p. 291:

There would appear to be no limitation on the time period within which a charge-back can be made, but it should probably be within a reasonable period of time as a matter of equity to the customer in knowing the state of the account.

Further, as held by this court in National Slag, at p. 383, a delay by the collecting bank in notifying the customer does not “turn a worthless cheque, by some legal legerdemain, into a good one.”  It is not suggested in the present case that there was a delay by the respondent in advising the appellant once the respondent received notice that the cheque had been dishonoured.

[14]         The appellant further submits that the trial judge erred in law by failing to allow the appellant’s counterclaim in negligence.  Specifically, the appellant argues that the respondent owed a general duty of care to its customer to exercise the skill and care of a reasonable banker, and that it breached this duty.  The appellant argues that the respondent had been told of the circumstances surrounding the appellant’s receipt of the cheque as well as the fact that the bulk of the funds would be sent by the appellant to Japan.  As a result, the appellant maintains that the respondent had a duty to advise the appellant that although the cheque had cleared, the credit could not be considered final and might later be reversed if the cheque was dishonoured by the drawee bank.

[15]         Unfortunately, the trial judge did not give any reasons for dismissing the negligence claim.  However, as noted by the respondent, the focus of the negligence claim in the pleadings and at trial was not as the appellant now argues, i.e. the duty to advise him of the possibility of a later reversal of the credit.  Rather, the focus in the pleadings and at trial was on the respondent’s failure to discover the material alteration and the respondent’s conduct after it was advised that the cheque had been dishonoured. 

[16]         In our view, this ground of appeal has no merit.  The respondent had no duty to warn the appellant in the circumstances of this case.  The appellant was the person best situated to prevent the loss and to make inquiries as to the validity of the cheque purportedly issued to him.  At the appellant’s request, the respondent advised him as to whether there were sufficient funds in the payor’s account.  The respondent did not and could not have given further assurances with respect to the validity of the cheque nor could it reasonably have known that the cheque would be later dishonoured.  There was, therefore, no breach of a duty of care by the respondent.

[17]         For these reasons, the appeal is dismissed.  The parties have indicated that they would likely be in a position to reach an agreement on costs.  If they are unable to agree, the respondent shall submit brief submissions within two weeks hereof and the appellant shall submit a brief response two weeks thereafter.

“D. O’Connor A.C.J.O.”

“E.A. Cronk J.A.”

“Paul Rouleau J.A.”

RELEASED: July 12, 2011