


COURT OF APPEAL FOR ONTARIO

CITATION:

Teva Canada
    Limited v. Bank of Montreal, 2012 ONCA 486

DATE: 20120709

DOCKET: C55143

OConnor A.C.J.O., MacPherson and Rouleau JJ.A.

BETWEEN

Teva Canada Limited

Plaintiff (Respondent)

and

Bank of Montreal, Canadian Imperial Bank of
    Commerce, TD Canada Trust and
Bank of Nova Scotia

Defendants (Appellant)

AND BETWEEN

The Bank of Nova Scotia

Plaintiff by Counterclaim

and

Teva Canada Limited,
    Neil Kennedy McConachie, Renzo G. Tittarelli and Florindo Costanzo

Defendants by Counterclaim

Martin Sclisizzi, for the appellant, Bank of Nova Scotia

Sean Cumming and Colby Linthwaite, for the respondent,
    Teva Canada Limited

Heard:  July 5, 2012

On appeal from the order of Justice Sandra Chapnik of the
    Superior Court of Justice, dated October 28, 2011.

By the Court:

[1]

This appeal results from the refusal by
    the courts below to allow the appellant, Bank of Nova Scotia, to amend its
    statement of defence to plead the defence of estoppel.

[2]

The respondent, now named Teva Canada
    Limited, sued Bank of Nova Scotia in conversion.  The claim arises from a fraud
    allegedly carried out by McConachie, an employee of Teva.  The statement of
    claim alleges that McConachie, perhaps with others, caused Teva to issue
    cheques to companies with similar sounding names to Tevas customers.  He
    deposited 43 cheques in accounts at Bank of Nova Scotia over a period of two
    years.  Bank of Nova Scotia presented the cheques to Tevas bank for payment,
    collected the proceeds and credited the proceeds to the accounts opened by
    McConachie.  Teva claims $4,000,000 from Bank of Nova Scotia for conversion as
    well as consequential damages.

[3]

In its statement of defence, Bank of Nova
    Scotia denies conversion because there were no endorsements on the cheques and
    the cheques were deposited in accounts in the payees name.

[4]

Bank of Nova Scotia moved before Master
    Graham to amend its statement of defence to plead estoppel.

[5]

The Master refused the amendments on the
    basis that Bank of Nova Scotia had not pleaded sufficient details in support of
    the defence of estoppel.  In particular, the proposed pleading did not include
    allegations of representations made by Teva to Bank of Nova Scotia, breaches of
    duty by Teva or reliance on such breaches by Bank of Nova Scotia.

[6]

Bank of Nova Scotia appealed to the
    Divisional Court.  Chapnik J. dismissed the appeal.

[7]

With the consent of Teva, the appeal
    judge considered a new proposed statement of defence in which Bank of Nova
    Scotia included more particulars of the estoppel defence in an attempt to address
    the deficiencies identified by the Master.  There are two parts to the proposed
    pleading of estoppel.  The first alleges that Teva knew of the fraud and
    breached a duty to prevent a continuation of the fraudulent conduct.  In oral
    argument, Tevas counsel accepted that Bank of Nova Scotia should be permitted
    to plead Tevas actual knowledge of the fraud and rely upon the consequences
    flowing from that knowledge.

[8]

The second and main part of the proposed
    pleading alleges that Teva was negligent in failing to ensure the cheques drawn
    on its accounts were properly drawn.  This is often referred to as estoppel by
    negligence.  It asserts that if Teva had examined the cheques in a timely way,
    it would have detected the fraud and should have taken steps to prevent further
    fraud.  It also pleads that it relied on Tevas failures to its detriment.

[9]

In dismissing the appeal, the appeal
    judge concluded that the proposed amendment is rooted in generalities and does
    not plead any of the required elements [of estoppel] substantively.

[10]

The appeal judge went on to hold that, in any event,
    the proposed defence of estoppel by negligence is untenable in law.  She
    pointed out that the tort of conversion on which Tevas claim is based is one
    of strict liability in matters concerning bills of exchange.  She referred to
    the Supreme Court of Canadas decision in
Boma Manufacturing Ltd. v.
    Canadian Imperial Bank of Commerce
, [1996]
    3 S.C.R. at 727, where the court held that contributory negligence is not
    available as a defence to a claim similar to the present one against a bank
    based in conversion.  She reasoned that there is no fundamental distinction
    between the common law defence of contributory negligence and the equitable
    defence of estoppel by negligence.  The appeal judge observed that there is no Canadian
    authority holding that estoppel by negligence constitutes a defence to a
    conversion action in circumstances involving the processing of bills of
    exchange by banks.

[11]

Bank of Nova Scotia appeals to this court with leave.

[12]

As mentioned, Bank of Nova Scotias plea is primarily
    focussed on a defence of estoppel by negligence.  It argues that estoppel by
    negligence has the following elements:  a) the representor owed a duty of care
    to the representee; b) the representor negligently or carelessly failed to
    perform the duty; c) the negligence of the representor caused the representee
    to believe a certain state of facts; and d) the negligence was the proximate or
    real cause of a loss to the representee.

[13]

Bank of Nova Scotia fairly concedes that the duty of
    care owed by a drawer of a cheque to the collecting bank that it wishes to
    plead has not, to this point, been recognized by a Canadian court, but argues
    it is analogous to a recognized duty.  As such, this is an appropriate case to
    apply the two-step test set out in
Anns
to determine if the court should recognize a new duty of care.  It goes
    on to argue that the determination as to whether a new duty of care should be
    recognized should not be resolved at a preliminary stage on a motion to amend a
    pleading.  Rather, it says that the existence of such a duty and the scope and
    content of the duty should be determined at a trial on a full evidentiary
    record.

[14]

Teva agrees that there is no recognized duty of care
    owed by a drawer of a cheque to a collecting bank.  It argues, however, that
    the law in this area is settled and this is not a case where
Anns
could possibly apply.

[15]

We agree with the motion judge that the Supreme Court
    of Canadas decision in
Boma
is
    dispositive of Bank of Nova Scotias plea of estoppel by negligence.  In our
    view, there is no basis to distinguish what the court said in
Boma
with
    respect to a defence of contributory negligence when considering this proposed
    defence.

[16]

Like the present case,
Boma
involved a fraudulent employee who caused cheques to
    be issued in names similar to people that the company dealt with, but for
    amounts which were not due.  As in this case, the bank received the cheques
    from the fraudulent employee, who had no title to them, and collected on them from
    the employers bank.  In doing so, the collecting bank was,
prima
    facie
, liable for the tort of conversion.

[17]

In
Boma
,
    Justice Iacobucci for the majority reviewed the law of conversion and confirmed
    the longstanding rule that the tort of conversion is a matter of strict
    liability.  The bank in that case had argued that the drawer of the cheque was
    in the best position to detect its employees fraud and that it was negligent
    in failing to do so.  Justice Iacobucci stated at para. 32 that the notion of
    strict liability involved in an action for conversion is primarily antithetical
    to the concept of contributory negligence and concluded, at para. 35:

As I stated above, however, it seems as a matter of principle
    that contributory negligence would not be available in the context of a strict
    liability tort.  If the contributory negligence approach is to be introduced
    into this area of law, I would leave that innovation to Parliament because such
    a change would be more appropriate for the legislative branch to make.
As I
    see it, the strict liability feature of conversion is well engrained in the
    jurisprudence concerning bills of exchange.
[Emphasis added.]

[18]

Estoppel and contributory negligence are separate
    legal concepts.  Both, however, would require an assessment of the same facts
    surrounding the conduct of Bank of Nova Scotia and Teva and would require a
    determination based on findings of the respective negligence of the maker of
    the cheque and the bank.

[19]

In
Boma
,
    the court recognized that there is a tension between the laws need for
    certainty and equitys need to achieve objectively fair results.  In the case
    of bills of exchange, courts of law and equity over several hundred years have
    determined that certainty is the predominant value and that the operation of an
    efficient banking market requires strict adherence to objective rules for the
    allocation of risk.

[20]

We are of the view that if one applies the line of
    reasoning set out by the court in
Boma
to the circumstances in this case, it is not tenable that a court would
    recognize the new duty of care urged by Scotia Bank, nor would it recognize the
    availability of a defence of estoppel by negligence which Bank of Nova Scotia
    seeks to plead.  Doing so would change the allocation of risk and affect the
    certainty with which participants in the banking system now conduct banking
    transactions.

[21]

We would add to the above what LaForest J. said in a
    concurring judgment in
C.P. Hotels Ltd. v. Bank of Montreal
, [1987] 1 S.C.R. 711.  The court in that case was
    considering the question of previously unrecognized duties owed by a drawer of
    a cheque to its own bank.  The court declined to recognize a wider duty than
    had been previously found to exist.  At p. 779, LaForest J. said the following:

A major reason for the rejection of a wider duty is that
    already mentioned:  the need for a rule that was clear in most circumstances,
    cutting within a narrow compass the cases where the loss was directly
    attributable to the customer because of negligence or otherwise.  Parke B.
    clearly expressed the policy militating against a wider duty in Bank of Ireland
    v. Evans Trustees (1855), 5 H.L.C. 389, 10 E.R. 950, at pp. 410-11 (H.L.C.),
    p. 959 (E.R.):

If such negligence could disentitle the Plaintiffs, to what
    extent is it to go?  If a man should lose his cheque-book, or neglect to lock
    the desk in which it is kept, and a servant or stranger should take it up, it
    is impossible in our opinion to contend that a banker paying his forged cheque
    would be entitled to charge his customer with that payment.

Such broad uncertainty is out of place in the governance of
    negotiable instruments.

[22]

In
    our view, that reasoning is apposite the circumstances in this case.  In
    summary, we agree with the appeal judge that the proposed plea of estoppel by
    negligence is not tenable and that leave to amend to assert that plea should
    not be granted.

[23]

In the result, we would allow the appeal to the extent
    of giving leave to Bank of Nova Scotia to amend its statement of defence to
    plead defences arising from Tevas actual knowledge of the fraudulent conduct.

[24]

In all other respects, the appeal is dismissed.  We
    direct that Bank of Nova Scotia pay Tevas costs of the appeal fixed in the
    amount of $10,000, inclusive of disbursements and HST.

Released:

JUL -9 2012                                     Dennis
    OConnor A.C.J.O.

DOC                                                J.C.
    MacPherson J.A.

Paul
    Rouleau J.A.


