Those found guilty of involvement in fraudulent cheque schemes can be required under the Criminal Code to pay restitution to any one who has sustained loss as a result of the commission of the offence. But an order in hand is a long way from the actual recuperation of the pecuniary loss incurred as a result of the offender’s criminal conduct, and large losses often remain unsatisfied.
Thus, the answer to the question: which innocent party — the defrauded company/person (the drawer of the cheque) or the collecting banks (the drawee) — should bear the loss resulting from a fraudulent cheque scheme can have significant implications.
Banks will not be happy, as their involvement may subject them to legal liability under the tort of conversion.
As held in Teva Canada Ltd. v. TD Canada Trust, 2017 SCC 51, the tort of conversion involves the wrongful interference with the goods of another. Where a collecting bank pays out on a forged endorsement, it will be liable for conversion. Conversion is a strict liability tort. As a result, a bank may be held liable whether or not it was negligent. Any alleged contributory negligence on the part of the drawer is, as a result, irrelevant.
Teva Canada Ltd. v. TD Canada Trust, at paras. 3,4.
However, liability for conversion can be avoided where the payee is a fictitious [FN1] or non-existing person [FN2].
Section. 20(5) of the Bills of Exchange Act, R.S.C., 1985, c. B-4.
According to the majority of the Supreme Court of Canada, that legal rule is additionally supported by sound public policy: banks are well-situated to handle the losses arising from fraudulent cheques, allowing those losses to be distributed among users, rather than by potentially bankrupting individuals or small businesses which are the victims of fraud [FN3].
[FN1] A payee is fictitious when the drawer does not intend to pay the payee. Intent to pay may be presumed or attributed.
[FN2] A payee is non-existing if the payee is neither a legitimate payee of the drawer nor a payee who could reasonably be mistaken for a legitimate payee of the drawer.
[FN3] However, the minority justices took the view that it is contrary to public policy to make bank customers (to whom the costs of fraud are indirectly passed) the de facto insurers against cheque fraud. As the drawer company (and not the drawee bank) is in the best position to implement procedures to deter fraud, the risk of loss should rest with it (at paras. 132, 133).