S.C.C. No. 36918

IN THE SUPREME COURT OF CANADA (ON APPEAL FROM THE COURT OF APPEAL FOR )

BETWEEN: TEVA CANADA LIMITED

APPELLANT

AND TD CANADA TRUST and OF NOVA SCOTIA

RESPONDENT

AND CANADIAN GENERIC PHARMACEUTICAL ASSOCIATION

INTERVENER

FACTUM OF THE INTERVENER CANADIAN GENERIC PHARMACEUTICAL ASSOCIATION (Rule 42 of the Rules of the Supreme Court of Canada)

LIEBMAN LÉGAL INC. SUPREME ADVOCACY LLP 1 Westmount Square #1750 340 Gilmour St., Suite 100 Montreal, Canada H3Z 2P9 Ottawa, Ontario K2P 0R3

Irwin I. Liebman Marie-France Major Moe F. Liebman Tel.: (613) 695-8855 Tél/Tel: (514) 846-0666 Fax: (613) 695-8580 Télécopieur/Fax: (514) 935-2314 Email: [email protected] Email: [email protected] Ottawa Agent for Counsel for the Counsel for the Intervener Canadian Generic Intervener Canadian Generic Pharmaceutical Association Pharmaceutical Association

FRED TAYAR & ASSOCIATES SUPREME ADVOCACY LLP Professional Corporation 340 Gilmour St., Suite 100 Barristers and Solicitors Ottawa, Ontario K2P 0R3 65 Queen St., West, Suite 1200 , Ontario M5H 2M5 Marie-France Major Tel.: (613) 695-8855 Colby Linthwaite Fax: (613) 695-8580 Fred Tayar Email: [email protected] Tel. (416) 363-1800 Fax. (416) 363-3356 Ottawa Agent for Counsel for the Email: [email protected] Appellant, Teva Canada Limited [email protected]

LANGLOIS LAWYERS LLP 1250, René-Lévesque Blvd. West, 20th Floor Montréal QC H3B 4W8

Karen M. Rogers Danielle Ferron Daniel Baum Tel.: (514) 842-9512 Fax: (514) 845-6573 Email: [email protected] [email protected] [email protected]

Counsel for the Appellant

BORDEN LADNER GERVAIS LLP BORDEN LADNER GERVAIS LLP Barristers & Solicitors Suite 1300, 100 Queen Street Scotia Plaza, 40 King Street West Ottawa, ON K1P 1J9 Toronto, Ontario M5H 3Y4

Martin Sclisizzi Nadia Effendi Tel: (416) 367-6027 Tel.: (613) 787-3562 Fax: (416) 361-2765 Fax: (613) 230-8842 Email: [email protected] Email: [email protected]

Counsel for the Respondent, Ottawa Agent for Counsel for the The Bank of Nova Scotia Respondent, The Bank of Nova Scotia

McCARTHY TETRAULT LLP BORDEN LADNER GERVAIS LLP 66 Wellington Avenue, Suite 4700 Suite 1300, 100 Queen Street Toronto Dominion Bank Tower Ottawa, ON K1P 1J9 Toronto, Ontario M5K 1E6

Frank McLaughlin Nadia Effendi Tel.: (416) 601-7531 Tel.: (613) 787-3562 Fax: (416) 868-0673 Fax: (613) 230-8842 Email: [email protected] Email: [email protected]

Counsel for the Respondent, TD Canada Ottawa Agent for Counsel for the Trust Respondent, TD Canada Trust

TABLE OF CONTENTS

TAB PAGE PART I – OVERVIEW ...... 1 PART II – POINTS IN ISSUE ...... 2 PART III – STATEMENT OF ARGUMENT...... 2 A. The BEA should be interpreted in light of its overall policy objective: certainty ...... 2 B. Collecting should continue to assume a degree of risk for cheque fraud ...... 3 C. An approach based on an individualized assessments of internal cheque approval policies engenders uncertainty and a reassignment of risk ...... 5 D. Any change to the existing allocation of risk should occur via legislation ...... 6

PART IV – STATEMENT ON COSTS ...... 7 PART V – ORAL SUBMISSIONS AT HEARING ...... 7 PART VI – TABLE OF AUTHORITIES ...... 9 PART VII – STATUTORY PROVISIONS ...... 9

PART I – OVERVIEW AND STATEMENT OF FACTS

1. This appeal revisits the allocation of liability for employee cheque fraud as between Canadian businesses and banks.

2. The Appellant Teva, a victim of employee cheque fraud, brought an action in conversion against the Respondent banks. The Ontario Superior Court of Justice, on summary judgment, found in favour of the Appellant. The Ontario Court of Appeal reversed the decision of the Motion Judge, finding that the Respondents could properly avail themselves of the defense under section 20(5) of the Bills of Exchange Act (the “BEA”). Significantly, the Ontario Court of Appeal found the Appellants had failed to “put in place and follow a policy for approving the issuance of their cheques1”, such that the intended payees were “fictitious” and “non-existing” within the meaning of the statute.

3. The Canadian Generic Pharmaceutical Association (“CGPA”) submits that, the Bills of Exchange Act should, above all, be interpreted and applied so as to ensure that the rules governing risk allocation for fraud are clear, consistent and predictable. This appeal gives this Court the opportunity to reaffirm the overarching objective of commercial certainty in chequing transactions, including the strict liability of banks for employee cheque fraud and the absence of a defense in drawers’ negligence.

4. If followed, the approach of the Ontario Court of Appeal would engender uncertainty for its members and similar Canadian businesses. Such an approach would require Courts to scrutinize companies’ internal cheque-approval on the basis of an ill-defined standard and litigated on a case-by-case basis. This represents a change in the pre-existing state of law, notably articulated by this Court in Boma Manufacturing v CIBC2, under which notions akin to drawers’ negligence were not available to the banks as a defense.

5. Canadian banks occupy a central role in the bills of exchange system and derive substantial benefit from its proper functioning. As such, in accordance with the overall scheme of

1 Teva Canada Limited v , 2016 ONCA 94 at para. 84 [Book of Authorities of the Intervener (“BAI”) TAB 7] 2Boma Manufacturing Ltd. v Canadian Imperial Bank of Commerce, [1996] 3 SCR 727 (“Boma”) [BAI TAB 1] -2- the Bills of Exchange Act, they should therefore continue to bear a degree of responsibility for the risks inherent to that system, including employee cheque fraud.

6. Finally, the CGPA submits that any new requirements circumscribing internal corporate fraud prevention policies and affecting the allocation of risk between banks and their clients would be most appropriately dealt with via legislative amendment.

PART II – POINTS IN ISSUE

7. The CGPA’s submissions are directed at the interpretation and application of section 20(5) of the Bills of Exchange Act. It will limit its discussion to questions of law and the practical commercial implications thereof.

PART III – STATEMENT OF ARGUMENT

A. The BEA should be interpreted in light of its overall policy objective: certainty

8. It is the CGPA’s position that the rules allocating liability for employee cheque fraud should – above all else – be clear, consistent and predicable. This Court has held that the Bills of Exchange Act should be interpreted and applied in furtherance of this overarching policy objective.

9. The bills of exchange system rests upon its participants’ observance to a set of objective and predictable rules governing risk allocation and liability. This Court highlighted the importance of this policy goal in Boma:

“… the underlying principles of the Act, including those of negotiability, certainty, and finality respecting commercial paper and commercial paper transactions, must be respected”.3

10. In Canadian Pacific Hotels Ltd. v Bank of Montreal4, LaForest J.’s concurring opinion held that the bills of exchange system had its “own policy and structural requirements.”5, foremost

3 Boma,supra, para 91 [BAI TAB 1] 4 Canadian Pacific Hotels Ltd. v Bank of Montreal, [1987] 1 SCR 711(“Canadian Pacific”) [BAI, TAB 2] 5Canadian Pacific, supra, at para 58 [BAI,TAB 2] -3-

of which being “the necessity for clear rules of general application”6 and that “uncertainty is out of place in the governance of negotiable instruments”.7

11. LeDain J., for the majority, refused to recognize any wider duty of care owing to a bank by its customers for preventing forged cheques – even where such customers were “sophisticated commercial customers” – because finding as such “would lead to great uncertainty”.8

12. More recently, the Ontario Superior Court of Justice found that Canadian banking legislation – including the BEA – “allocates responsibility for loss and liability to bring an element of certainty for the benefit of all persons participating in the Canadian banking system”9 and that “to reallocate such risk by recognizing a duty of care owed by drawers of negotiable instruments to collecting banks would, in [its] view, frustrate the intention of Parliament to create certainty and predictability within the banking system”.10

13. The strict liability regime for cheque conversion is an example of a rule that facilitates the quick and predictable resolution of disputes among the participants in the chequing system.

14. The CGPA submits that these underlying policy objectives would be jeopardized if liability for cheque employee fraud were allocated on the basis of individualized assessments of internal corporate policies as between businesses and banks.

B. Collecting banks should continue to assume a degree of risk for cheque fraud

15. This Court has recognized the commonly known fact that Canadians heavily rely upon the banks to provide them with secure and efficient payment systems and instruments. Indeed, Canadian banks occupy a predominant role in the bills of exchange system and derive substantial benefit from it.

6Canadian Pacific, supra, at para 58 [BAI,TAB 2] 7Canadian Pacific, supra at para 59 [BAI,TAB 2]; Teva Canada Limited v Bank of Montreal, 2012 ONCA 486,at para 21 [BAI,TAB 8] 8Canadian Pacific, supra, at para 50 [BAI,TAB 2] 9 Royal v Société Générale (Canada), 2005 CanLII 63767 (ON SC),at para 61, appeal allowed on other grounds, 2006 CanLII 42545 (ON CA), leave to appeal to SCC refused: 31878 (September 6, 2007) [BAI,TAB 6] 10 v Société Générale (Canada), 2005 CanLII 63767 (ON SC), at para 63 [BAI,TAB 6] -4-

16. It follows that banks should continue to bear a degree of responsibility for protecting against the risks inherent to these systems and instruments, including employee cheque fraud.

17. As this Court has previously recognized, Canadian bills of exchange legislation makes banks ultimately liable for various forms of payment fraud:

“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.”11

18. In Boma, the majority of this Court held:

“To some, the allocation of risk in the bills of exchange system may seem arbitrary, but in my view a necessary and coherent rationale sustains this allocation. With respect to forged endorsements, for example, no party in particular is in any better position to detect the fraud 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 to enjoy the significant benefits of the bills of exchange scheme, not the least of which is, from the bank's perspective, the facilitation of huge numbers of financial dealings conducted rapidly, and without overwhelming transaction costs. While the banks are accorded the important advantage of holder in due course status in many situations, it would not be appropriate, as the respondent would have it, to exempt any party, including collecting banks, from all exposure to the risk and consequence of fraud.12”

19. More generally, tort law imposes strict liability such that a recurrent type of loss is assumed by “the party best able to bear it” 13 In CP Hotels, LaForest J. discussed the distribution of loss for cheque forgery in similar terms:

“A further justification for restricting the duty within narrow bounds was later advanced, namely, that this effected a better distribution of loss. As Bray J. put it in Kepitigalla Rubber Estates,

11 Royal Bank of Canada v Concrete Column Clamps, [1977] 2 SCR 456, at 484 [BAI, TAB 5] 12 Boma, supra, para 80 [BAI,TAB 1] 13 Allen M. Linden, Lewis N. Klar & Bruce Feldthusen, Canadian Tort Law: cases, notes & materials, 14th ed. (Markham: LexiNexis Butterworths, 2014), at p.619 [BAI,TAB 9] -5-

Ltd. v. National Bank of India, [1909] 2 K.B. 1010, at p. 1026: "To the individual customer the loss would often be serious; to the banker, it is negligible.”14

20. Similarly, no defense in negligence is available to banks against an action for cheque conversion – a strict liability tort.15 In other words, a collecting bank cannot avoid liability by proving that a given fraud was caused by drawer’s negligence.16

21. The CGPA submits that the Bills of Exchange Act – and in particular section 20(5) – should not be reinterpreted so as to recalibrate this allocation of risk or the policies that underpin them.

C. An approach based on individualized assessments of internal cheque approval policies engenders uncertainty and a reassignment of risk

22. In the decision under appeal, the Ontario Court of Appeal decided that companies must put in place and follow an adequate policy for approving the issuance of their cheques, failing which, they could be held liable.17

23. Such an approach imposes a novel burden upon defrauded companies to positively demonstrate that their internal cheque-approval policies were adequate at the outset and then adequately followed.

24. The CGPA submits that such an approach represents a substantial shift in the pre- existing state of law, as notably articulated by this Court in Boma18. Indeed, Boma reaffirms the absence of negligence-type defenses for banks. It does not stand for the proposition that a company’s liability for employee cheque fraud is dependent upon a case-by-case analysis of its internal practices and policies.

25. For commercial actors like the CGPA and its members, adopting such an approach would raise a number of unanswered questions.

14Canadian Pacific, supra, para 60 [BAI,TAB 2] 15 Boma, supra, at para 31 [BAI,TAB 1] 16 Boma, supra, [1996] 3 SCR 727, at paras 31-32, 35 and 83 [BAI,TAB 1] 17 Teva Canada Limited v Bank of Montreal, 2016 ONCA 94 at para. 84 [BAI,TAB 7] 18 Boma, supra [BAI,TAB 1] -6-

26. In the wake of the Decision under appeal, it is unclear exactly what businesses must do to avoid being found negligent and liable for employee cheque fraud:

a) Under which precise circumstances will a company be found to be negligent for its own employees’ cheque fraud?

b) The requisite nature and extent of internal cheque approval policies is now uncertain. For example, what level of company executive must approve cheques? What level of company executive must approve and oversee the cheque approval policy?

c) To what extent must a company’s internal cheque-approval policy be properly followed – in actual fact – to avoid liability?

27. The answers to these questions are far from clear, and their resolution will likely result in complex litigation between the banks and businesses. Indeed, in the approach proposed by the Court of Appeal, each lawsuit concerning employee cheque fraud will likely result in evidence being adduced from all parties as regards to the internal management and control mechanisms of the defrauded company. In essence, courts will be called upon to appraise such internal policies and their effectiveness.

28. If such an approach were adopted, a company could not reasonably predict if and when it would be found to be negligent for employee cheque fraud of its employees. Moreover, it is uncertain what – if any – role any negligent conduct behalf of the banks would play under such an individualized analysis.

29. To resolve these issues, the CGPA submits that the Bills of Exchange Act should, above all, be interpreted and applied so as to ensure that the rules governing risk allocation for fraud are clear, consistent and predictable. The CGPA asks this Court to reaffirm these well established principles in light of the Ontario Court of Appeal’s apparent departure from them.

D. Any change to the existing allocation of risk should occur via legislation

30. In the absence of new legislation, Canadian Courts have consistently refused to alter the established principles governing the allocation of risk between the participants in the bills of -7-

exchange system.19 Yet, the approach adopted by the Court below, if followed, would significantly alter the law regarding liability in the context of cheque conversion.

31. In order to uphold the predominant value of certainty in the bills of exchange system, and the continued operation of an efficient banking market, the CGPA submits that the strict liability rule for cheque conversion should not be emptied of its meaning by enacting a negligence defense, though perhaps implicitly, by another name.

32. In order to ensure that all interested actors have a chance to express their views, any new requirements circumscribing internal corporate fraud prevention policies and affecting the allocation of risks between banks and their clients should be set out by an Act of Parliament. This is, after all, the position taken by this Court in previous, similar cases.20

33. When adjudicating with similar issue in the past in Boma and Concrete Column, this Court ultimately interpreted and applied the Bills of Exchange Act in accordance with its overall legislative scheme and purpose. The CGPA submits that, unless Parliament chooses to amend the existing legislation, no change should be made to the existing allocation of risk within the banking system.

PART IV – COSTS

34. The CGPA is not seeking costs and asks that it not be liable for costs to any other party.

PART V – ORAL SUBMISSIONS

35. In accordance with the decision of this Court dated January 13, 2017; the CGPA will make oral submissions not exceeding 5 minutes.

19 see Teva v Bank of Montreal, 2012 ONCA 486, at para 20 [BAI,TAB 8]; Cash House Inc. v Choy, 2015 ONCA 584,at para 5 [BAI,TAB 3]; Khosla v Korea , 2009 ONCA 467, at para 6 [BAI,TAB 4] 20 Boma, supra, at para 35 [BAI,TAB 1]; Royal Bank of Canada v Concrete Column Clamps (1961) Ltd., [1977] 2 SCR 456, at 484 [BAI,TAB 5] -8-

-9-

PART VI – TABLE OF AUTHORITIES

AT PARA. CASES 1. Boma Manufacturing v CIBC, [1996] 3 S.C.R. 727 ...... 4,9,18,24,32,33 2. Canadian Pacific Hotels Ltd. v Bank of Montreal, [1987] 1 SCR 711 ...... 10 3. Cash House Inc. v Choy, 2015 ONCA 584 ...... 30 4. Khosla v Korea Exchange Bank of Canada, 2009 ONCA 467 ...... 30 5. Royal Bank of Canada v Concrete Column Clamps (1961) Ltd., [1977] 2 SCR 456 ...... 17, 32, 33 6. Royal Bank of Canada v Société Générale (Canada), 2005 CanLII 63767 (ON SC), appeal allowed on other grounds 2006 CanLII 42545 (ON CA) leave to appeal to SCC refused: 31878 (September 6, 2007) ...... 12 7. Teva Canada Limited v Bank of Montreal, 2016 ONCA 94...... 2,10,22 8. Teva v Bank of Montreal, 2012 ONCA 486 ...... 10, 30 BOOKS 9. Allen M. Linden, Lewis N. Klar & Bruce Feldthusen, Canadian Tort Law: cases, notes & materials, 14th ed. (Markham: LexiNexis Butterworths, 2014) ...... 19

PART VII – STATUTORY PROVISIONS

Bills of Exchange Act, R.S.C., 1985, c. B-4, s. 20(5)

Fictitious payee Preneur fictif 20(5) Where the payee is a fictitious or non- 20(5) La lettre dont le preneur est une personne existing person, the bill may be treated as fictive ou qui n’existe pas peut être considérée payable to bearer. comme payable au porteur.