Recent Developments in Canadian Law: Bills of Exchange

RECENT DEVELOPMENTS IN CANADIAN LAW: BILLS OF EXCHANGE

Emil J. Hayek*

I. INTRODUCTION ...... 264

II. FORM ...... 265

A. Acceleration Clauses ...... 265

B. Sum Certain of Money ...... 266 1989 CanLIIDocs 26 C. Interest ...... 267

1. Fixed Rates ...... 267

2. Floating Rates ...... 269

D. At a Future Time ...... 272

E. Signing in a Representative Capacity ...... 273

III. DELIVERY ...... 276

IV. CONSIDERATION ...... 276

V. INCOMPLETE INSTRUMENT ...... 277

VI. HOLDERS ...... 278

VII. LIABILITIES OF PARTIES ...... 279

A. Accommodation Bill ...... 279

B. Liability of Guarantor ...... 281

C. Notes and Mortgages ...... 282

* Faculty of Law, University of Ottawa. 264 Ottawa Law ReviewlRevue de droit d'Ottawa [Vol. 21:1

VIII.DEFENCES ...... 283 A . Forgery ...... 283 B. Non Est Factum ...... 284

C. Material Alteration ...... 284

IX . CHEQUES ...... 285

A. Depository Bank as a Holder in Due Course ...... 285 B. Payment Over Countermand ...... 287 C. Banker-Customer Relationship ...... 288 1. Clearing a Cheque ...... 288 1989 CanLIIDocs 26 2. Forgery and Chequing Accounts ...... 290 3. Verification Agreements ...... 294

D. Certification ...... 295

I. INTRODUCTION

This survey deals with negotiable instruments; bills of exchange, cheques and promissory notes. Since generally the same legal principles apply to all three types of instruments,' there is no need to draw a distinction between them, unless the legal principles discussed apply to a particular instrument only; for example, stop-payment of a cheque. The survey does not cover the general law of banking except where there is a close connection with negotiable instruments. The period surveyed is from 1985 to reports available in July, 1988. There have not been any significant developments in the law of negotiable instruments during the period surveyed, with the exception of the reaffirmation of the Macmillan doctrine by the Supreme Court of Canada and the Privy Council, discussed in Part IX, Section C2. There have been, however, some interesting applications and further elaborations of existing principles.

1 See Bills of Exchange Act, R.S.C. 1970, c. B-5, ss. 165(2) and 186(1). All subsequent references to sections pertain to this Act unless otherwise indicated. 1989] Bills of Exchange

II. FoRm

A. Acceleration Clauses

First National Bank of Oregon v. A.H. Watson Ranching Ltd2 considered a promissory note with an acceleration clause which provided that upon default the holder would be entitled to payment of the entire unpaid principal together with interest thereon to the date of payment at the option and upon demand of the holder.3 It provided further that such principal and interest in default should further bear interest at the rate stated in the promissory note from the date of default until the date of payment. This acceleration clause differed from the usual ones used in that it provided for additional interest on the unpaid principal and interest from the time of default to the time of payment. The defendant argued that "interest. . .to the date of payment" would be impossible to calculate upon the demand of the holder because at the time of the demand the holder would not know when the payment would be made nor could the additional interest on outstanding principal and interest be calculated. Following Canada 1989 CanLIIDocs 26 Permanent Trust Co. v. Kowal4 Lomas J. held that this acceleration clause did not make the amount of the note uncertain. The note contained an unconditional promise to pay at a fixed time a sum certain of money. The acceleration became operative only on default and then only at the option and demand of the holder. The plaintiff (holder), in his notice of demand, asked for principal and interest outstanding at the time of demand and interest thereafter on the outstanding principal. He did not ask for interest on outstanding interest. In thus setting out the amount demanded in the notice, the plaintiff removed any possible ambiguity. The rationale of this case is that an ambiguous acceleration clause will not render an otherwise certain bill or note invalid for uncertainty when the holder removes the ambiguity of the acceleration clause by making a definite demand after default. Default is a condition precedent for activating an acceleration clause. In Fraga Enterprises Ltd v. Wright5 Richard C.J.Q.B.T.D. found that no default occurred even though the payments were not made on the due date. In this case a promissory note, containing a standard acceleration clause stating that default in any payment would render the entire unpaid balance payable upon demand, stipulated that payment was due on May 1. On May 1 the makers posted the necessary cheques to the holders who received them on May 4. The following

2 (1984), 34 Alta L.R. (2d) 110 (Q.B.), Lomas J. 3 Italics added. 4 (1981), 32 O.R. (2d) 37, 120 D.L.R. (3d) 691 (H.C.) and see E. Hayek, Recent Developments in Canadian Law: Bills of Exchange (1985) 17 OTTAWA L. REv. 589 at 595. 5 (1987), 82 N.B.R. (2d) 270, 208 A.P.R. 270 (Q.B.T.D.). Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 day the holders made a demand for the payment of the balance outstanding. Richard J. held that by mailing the cheques on May 1, the due date, the makers complied with the promissory note and were not in default. To hold otherwise would be to tolerate and encourage oppressive practice without any merit. The acceleration clause was not so precisely worded as to permit a finding of default when cheques were mailed on the due date. It would appear, according to this reasoning, that where a promissory note simply contains a schedule of payments, there is no default when cheques or other means of payment are mailed on the due date. The Court also held that section 42, which provides that three days of grace are added to the time of payment as fixed by the bill, applies also to promissory notes by virtue of subsection 186(1). Consequently there was no default as the cheques were received on May 4, the last of the three days of grace. B. Sum Certain of Money

The Bills of Exchange Act provides that a bill must be for a sum 1989 CanLIIDocs 26 certain of money.6 This requirement causes problems when parties draw a bill or note in connection with commercial transactions providing for flexible payment schedules, interest rates etc. A number of cases dealing with these issues have come before the courts. Gravelbourg Savings v. Bissonnette7 concerned a promissory note made for a sum certain of money with a fixed rate of interest repayable by monthly instalments, commencing in 1980 and ending in 1983. The problem which arose here was that the exact dates of the first and last instalments were left blank. In spite of these blanks, the Court held that the instrument was a valid promissory note. The amount payable was a sum certain, as the principal and the interest rate were clearly set out. The interest ran from the date of the notes and the amount payable could be calculated at any point in time. Although the first and last payments could have been made at any time during 1980 and 1983 respectively, this did not alter the fact that the note was for a sum certain. In Dawson v. Tomljenovich9 the British Columbia Court of Appeal refused to rule whether a note for a fixed amount with the proviso "the makers agree to pay all costs of collection, including attorney fees", was a valid note on the ground that the relevant legal issues were not adequately argued and therefore further hearing would be required. Esson J.A. stated that all Canadian cases to which he was

6 Ss. 17 and 28. 7 (1985), 43 Sask. R. 241 (Q.B.). 8 Bills of Exchange Act, R.S.C. 1970, c. B-5, s. 28(3), not referred to in the judgment in this context, says that ... unless the instrument otherwise provides, interest runs from the date of the bill.. 9 (1986), 7 B.C.L.R. (2d) 139 (C.A.). 19891 Bills of Exchange referred supported the proposition that the language of the note rendered the sum uncertain. He continued by stating that the Canadian cases were "not of binding authority and are sparsely reasoned on this question". Therefore, it was open to the Court to apply American jurisprudence which arrived at an opposite conclusion. Esson J.A.'s statement that the Canadian cases on point are not binding is surprising. A possible explanation is that all of the cases referred to were from other provinces. However, at least two of the cases referred to were at the appellate level in an area of law within federal jurisdiction. Further, the reference to the American jurisdiction was prompted by the fact that it was uncertain whether the note was governed by Canadian or American law and whether the unit of currency was in Canadian or American dollars. The Court of Appeal therefore set aside the trial judgment and remitted the action for a new hearing. The principle that a note for a fixed amount "plus accrued interest" is not made for a sum certain was reaffirmed by the Alberta Queen's Bench in the case Royal Bank of Canada v. Bauman.Io

Finally, in Bank of British Columbia v. Coopers & Lybrand Ltd" 1989 CanLIIDocs 26 promissory notes drawn payable ". .. with interest from the 'Construc- tion Completion Date' (as defined in the Purchase and Development Agreement. . .)" were held not to be for a sum certain of money within the meaning of subsection 176(1). The Court followed MacLeod Savings & Credit Union Ltd v. Perrett12 and stated that in this case extrinsic evidence was not admissible. The reference to the Purchase and Development Agreement would also not provide a remedy as the Agreement simply referred to a completion certificate to be issued.13 C. Interest

1. Fixed Rates

A provision of section 4 of the Interest Act,14 not widely known, may reduce the interest rate payable on a bill or note to five percent per annum. Section 4 provides that where interest is payable for a period of less than a year, interest chargeable shall not exceed five per cent per annum unless a yearly rate of interest is expressly stated. In Elcano Acceptance Ltd v. Richmond15 solicitors drew several notes offending the provision of section 4 and were held liable for negligence

10 (1986), 46 Alta L.R. (2d) 68 (Q.B.). 11 (1984), 59 B.C.L.R. 92 (S.C.). 12 [1981] 1 S.C.R. 78, 118 D.L.R. (3d) 193; see Hayek, supra, note 4 at 596-7. '3 For a discussion of other issues of this case, see infra, HOLDERS, Part VI. 14 R.S.C. 1970, c. 1-18. 15 (1985), 47 C.P.C. 256 (Ont. H.C.), Smith J., new trial ordered on proce- dural grounds (1986), 9 C.P.C. (2d) 260 (Ont. C.A.). Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 in respect of the amount of reduced interest. Smith J. held that the Interest Act applies to promissory notes. Promissory notes retain, in essence, their character as contracts and are therefore contracts in writing within the meaning of section 4 of the Interest Act. The determination of prejudgment interest on a dishonoured promissory note was considered in Toronto Dominion Bank v. Mr. Klean Enter. Ltd16 A demand promissory note was made by the corporate appellant in favour of the respondent bank for $132,700 "with interest payable monthly at the rate of 14.25 per cent per annum until paid." No payments were ever made so, therefore, the respondent bank demanded payment. The Court of Appeal affirmed the trial judgment that the bank was entitled to the principal amount, the interest at the rate stated in the note from the date of the execution of the note to the date of the demand and to the prejudgment interest calculated at the rate of five per cent on the principal from the date of the demand to the date of judgment. The following principles emerge from this judgment. Firstly, where a demand promissory note provides for a fixed rate of interest "until paid", the rate is applied to a period from 1989 CanLIIDocs 26 the execution of the note to the date of demand. Secondly, the prejudgment interest is calculated from the date of demand to the date of judgment at the statutory rate of five per cent, and not at the rate provided in the promissory note. This determination was based on section 134 of the Bills of Exchange Act which provides:

Where a bill is dishonoured, the measure of damages, which shall be deemed to be liquidated damages, are (a) the amount of the bill; (b) interest thereon17 from the time of presentment or maturity, as the case may be; and (c) the expenses of noting and protest.

Section 3 of the Interest Act 18 provides that in the event that parties do not fix a rate of interest but agree to pay interest, the rate will be five percent. Thus, in the case of bills of exchange, the rate of prejudgment interest is fixed by statute and the common law principle stated in Toronto Railway Co. v. City of Toronto19, that the rate and duration of such interest are determined by what the court considers fair and equitable, does not apply. Thirdly, prejudgment interest is calculated on the outstanding principal only and not on the whole of the principal. The word thereon,20 in section 134, refers to the principal amount owing on the bill.

16 [1987] 4 W.W.R. 461 (Sask. C.A.). 17 Italics added. is R.S.C. 1970, c. 1-18. 19 (1905), [1906] A.C. 117 (P.C.). 20 Italics added. 1989) Bills of Exchange

Whether interest is payable on a promissory note which states that it is payable with interest but does not specify the actual rate was one of the issues in Canadian Imperial Bank of Commerce v. Dene Mat Constr. Ltd 21 The defendants executed ten promissory notes on a standard printed form issued by the bank. The form provided for payment of the principal with interest and had a blank space for the insertion of the interest rate. Only four of the notes specified the rate of interest payable. The Court held that the six notes which remained blank as to the rate of interest were simply payable without interest. No uncertainty was created by leaving the interest rate blank, although the bank may have possibly inserted a rate of interest under section 32 dealing with incomplete instruments. Each note also provided for a minimum charge of five dollars. The Court interpreted it as a minimum amount of interest payable on each note.

2. Floating Rates

It is a common banking practice to grant advances carrying 1989 CanLIIDocs 26 floating rates of interest, usually expressed as a certain percentage above the bank prime rate, and to require the borrower to give a promissory note for the loan. Difficulty arises in drafting a valid promissory note providing for a floating interest rate, as such a note runs contrary to the requirement that a bill must be for a sum certain of money.22 One method used is to make out a promissory note specifying as its rate of interest a particular bank's prime rate plus a certain percentage. There are decisions to the effect that such an interest clause is too vague to be "a sum certain of money," 23 but a number of recent decisions uphold the validity of such notes. 24 This trend was re-affirmed in New Fort FinancialServices Ltd v. 85190 Holdings Ltd25 Following Royal Bank of Canada v. Reed26 the Court held that because the prime lending rate of a chartered bank was easily ascertainable there was "no such degree of uncertainty as to unduly affect the currency of the note".27

21 [1988] 4 W.W.R. 344 (N.W.T.S.C.). - Supra, note 16. 23 Bank of Montreal v. A & M Investments Ltd (1982), 136 D.L.R. (3d) 181 (Sask. Q.B.), Noble J.; Bank of Montreal v. Dezcam Industries Ltd (1983), 147 D.L.R. (3d) 359, [1983] 5 W.W.R. 83 (B.C.C.A.). 24 Royal Bank of Canada v. Reed (1982), 21 B.L.R. 64, [1983] 2 W.W.R. 419 (B.C.S.C.) (Lander L.J.S.C.); Royal Bank of Canada v. Stonehocker (1985), 61 B.C.L.R. 265 (C.A.), leave to appeal to S.C.C. refused [1985] 1 S.C.R. xiii, 61 N.R. 80; National Bank of Canada v. Pearl (1983) 33 C.P.C. 158 (Ont. Co. Ct). 25 (1984), 55 A.R. 157 (Q.B.). 26 Supra, note 24. 27 Supra, note 25 at 159. Ottawa Law ReviewlRevue de droit d'Ottawa [Vol. 21:1 National Bank of Canada v. Intracom Investments Ltd28 upheld the validity of a note at an interest rate of two percent above the National Bank's prime rate. Barry J. also adopted the reasoning of Lander L.J.S.C. in Royal Bank of Canada v. Reed, 29 that "the incor- poration by reference of the Royal Bank of Canada's prime lending rate does not in my view create such a degree of uncertainty to unduly affect the negotiability of the note". He stated that it would be a simple matter to determine a bank's prime interest rate at any one time and that to hold otherwise would "wreak havoc on commercial transactions". Another case upholding the validity of a floating interest rate note is Banque Nationale de Paris (Canada) v. Milton Develop- ments Ltd30 In these two last mentioned cases 31 it should be noted that the Court allowed a simple and not a compound rate of interest. Where, however, the prime interest rate is not readily ascertainable, a promissory note will be held void for uncertainty, as was the situation in Alta. Treasury Branches v. N. Braaten & Sons Enter. Ltd.32 In this case, promissory notes were payable at a specified percentage above the prime rate charged by the Provincial Treasurer. 1989 CanLIIDocs 26 Evidence showed that the Provincial Treasury Branch had several different 'prime' rates of interest at some periods. In addition, the Treasury Branch sent out directives setting out limits for maximum interest rates notwithstanding what the prime rates might have been. Bracco J. expressed the view that the multiplicity of the "prime" rates of interest together with the maximums overriding these prime rates confirmed his decision that the promissory notes fell short of the certainty required. These notes were issued in respect of loans and there were no separate loan agreements. It was held that although the notes were void, they indicated a promise by the maker to repay the loans with interest. In the absence of a clear agreement as to the interest rate, the Judge exercised his discretion and assessed the interest rate at five percent by reference to the Interest Act. 33 In Bank of Nova Scotia v. Hildebrandand Olfert34 the bank sued the defendants for the balances owing under promissory notes which were executed to secure loans. The notes specified fixed rates of interest whereas the loan forms indicated floating interest rates. In a judgment difficult to comprehend, Glowacki J. stated that it appeared obvious that the parties intended the floating interest rate to apply even though it was not set out in this way on the note. He therefore granted

28 (1985), 64 N.B.R. (2d) 351, 165 A.P.R. 351 (Q.B.), var'd on other grounds (1986), 72 N.B.R. (2d) 34, 183 A.P.R. 34 (sub nom. National Bank of Canada v. Zed and Clark (N.B.C.A.). 29 Supra, note 24. 30 (1987), 77 A.R. 39 (Q.B.). 31 Supra, notes 28 and 30. 32 (1987), [1988] 4 W.W.R. 79 (Alta Q.B.). 33 R.S.C. 1970, c. 1-18. 34 (1987), 49 Man. R. (2d) 265 (Q.B.). 1989] Bills of Exchange judgment in favour of the plaintiff for the balance of the loans owing with interest calculated at a floating rate. No authority was quoted nor legal reasoning given in support of this decision apart from the reference to the intention of the parties. Another method of calculating floating interest rates utilizes a pro forma fixed rate of interest, coupled with an agreement or understanding to pay a floating rate of interest. This method cannot be used validly with promissory notes because evidence of an agreement to pay the floating rate of interest which contradicts the interest rate noted on the promissory note is inadmissible under the parol evidence rule. In Royal Bank of Canada v. Wilford35 Galligan J. held, without quoting any authorities, that all of the evidence of an agreement for a rate of interest other than that set out in the note was inadmissible. He continued by stating that parol evidence is nonetheless admissible to explain an agreement that is ambiguous on its face. Condis Int'l Ltd v. Bank of Nova Scotia36 was an action to obtain reimbursement for an overpayment made by the plaintiffs on the

repayment of certain promissory notes. A number of promissory notes, 1989 CanLIIDocs 26 issued over a period of time by the plaintiffs, were for a fixed interest rate of 9 per cent per annum. There was both an understanding and knowledge that a floating rate would be payable, although there was no written agreement to that effect. The defendant bank debited the plaintiff's account with interest calculated at varying rates well in excess of 9 per cent. Hollingworth J. dealt with three main issues: parol evidence, verification agreements and payment under mistake of law. On the issue of parol evidence, Hollingworth J. held that since the "alleged collateral agreement [re floating rate of interest] conflict[s] with the written document [promissory notes]," the parol evidence rule was violated and the rate of interest stated on the promissory note would prevail. In support of his conclusions, Hollingworth J. referred to the judgment of Galligan J. in Royal Bank of Canada v. Wilford,37 the Supreme Court of Canada decision in Hawrish v. Bank of MontrealP8 and to a passage on the parol evidence rule taken from THE LAW OF EVIDENCE IN CIVUL CASES by J. Sopinka and S. Lederman. 39 It was held in the Condis decision that, although the bank was prevented from charging an interest rate other than that stated in the note, it could retain the overpayments by virtue of the verification agreement. The bank had debited the plaintiff's account with the higher interest wrongly charged on the notes. Nonetheless, there was an agreement to the effect that if the plaintiffs did not raise any objections against the statement of the account within thirty days, they would be thereafter

35 (1986), 38 A.C.W.S. (2d) 387. 36 (1987), 7 A.C.W.S. (3d) 280. 37 Supra, note 35. 38 [1969] S.C.R. 515, 2 D.L.R. (3d) 600. 39 (Toronto: Butterworths, 1974) at 270. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 foreclosed from doing so. No objections were made and as a result the bank could retain the overpayments. 40 Having decided the defence of verification agreement in favour of the bank, Hollingworth J. considered another defence. The bank claimed that the overpayments were made under a mistake of law and were not recoverable. Holling- worth J. ruled in favour of the bank, following the majority decision 41 in Nepean Hydro Electric Comm'n v. Ontario Hydro. Extrinsic evidence to determine the rate of interest charged on loans was admitted in Royal Bank of Canada v. H. Handys Services Ltd42 In this case, the bank had made several advances to the defendant. With respect to each advance, the defendant made a promissory note having a fixed interest rate, with the exception of the last note, which provided for the prime rate plus 21/2 per cent interest. The fixed interest rate on the preceding notes represented the then current prime rate plus 22 per cent. The bank also obtained guarantees and chattel mortgages to secure the advances and these instruments provided for floating interest rates. The bank's position was that the rate of interest chargeable on the advances was a floating rate. In contrast, the 1989 CanLIIDocs 26 defendant maintained that a fixed rate, set out on the various notes, was applicable. Kennedy J. stated that the interest rate to be applied to the note could only be properly ascertained by the introduction of extrinsic evidence. Taking all of the evidence into account, Kennedy J. was satisfied that the defendant committed itself to pay interest at a floating rate. It is to be noted that the validity of the promissory note was not the issue. Rather, the dispute concerned the rate of interest chargeable on the advances and the realization of collateral.

D. At a Future Time A bill must be payable on demand or at a fixed or determinable future time.43 A divergency exists between English and Canadian jurisprudence as to the validity of a bill drawn payable "on or before a fixed rate". The majority of the English Court of Appeal held in Williamson v. Rider44 that such a bill was not an unconditional order to pay at a fixed or determinable future time. This view was recently re-affirmed by the English Court of Appeal in Claydon v. Bradley.45 The Supreme Court of Canada in John Burrows Ltd v. Subsurface

4 Arrow Transfer Co. v. Royal Bank of Canada, [1972] S.C.R. 845, 27 D.L.R. (3d) 81 [hereinafter Arrow Transfer] was referred to as authority. 41 [1982] 1 S.C.R. 347, 132 D.L.R. (3d) 193. For a more comprehensive treatment of floating interest rates, see E. Hayek, Promissory Notes and Floating Interest Rates (1989) 3 B.EL. REv. 210. 42 (1985), 38 Man. R. (2d) 57 (Q.B.). 43 S. 17. - (1962), [1963] 1 Q.B. 89, [1962] 2 All E.R. 268 (C.A.). 45 (1986), [1987] 1 W.L.R. 521, [1987] 1 All E.R. 522 (C.A.). 1989] Bills of Exchange

Surveys Ltd46 adopted the dissenting view of Ormrod J. in Williamson v. Rider that such a bill is payable at a fixed future time, that is to say the date stated, with an option to pay at an earlier date. The Uniform Commercial Code (United States) expresses a similar view in Article 3-109. E. Signing in a Representative Capacity Disputes continue to arise as to whether a person signing an instrument on behalf of a corporation incurs personal liability or whether he merely authenticates the signature of the corporation, notwithstanding the authoritative decision of the Ontario Court of Appeal in Allprint Co. v. Erwin.47 In the following two cases, instruments were signed on behalf of defunct companies; in neither case did this fact affect the validity of the instruments. In the first case, FairbankLumber Co. v. Ball,48 two signatures appeared underneath the name of the drawer company. 49

Following Allprint, the Court held that there was no ambiguity and 1989 CanLIIDocs 26 that there would be no difficulty in concluding that this was indeed a corporate cheque. Counsel for the plaintiff tried to distingish Allprint on the ground that in that case, only one50 signature appeared underneath the name of the company. This argument was unsuccessful. Although the drawer company was defunct, the Judge held that the cheque was a valid cheque drawn on a corporate account. The second case, Royal Bank of Canadav. Starr,51 dealt with general issues arising out of signing a note on behalf of a dissolved company. The first issue addressed was the determination of who had made the note. The note was signed with the typed corporate name with the written signature "Morton Starr" affixed underneath. Quoting AllprintS2 and cases cited therein, Carter D.C.J. found that there was sufficient ambiguity to admit extrinsic evidence to ascertain the intention of the parties. Based on the evidence admitted, the note was found to be that of the corporation. At the time of the execution of the note, the company had been dissolved by a governmental administrative order. The plaintiff bank, the payee of the note, was unaware of this fact. It was held that it would be unreasonable to require a bank to ensure the legal status of the corporate client. The second issue addressed was whether a breach of warranty of authority occurred. The Court found that by

46 [1968] S.C.R. 607, 68 D.L.R. (2d) 354. - (1982), 38 O.R. (2d) 13, 136 D.L.R. (3d) 587 (C.A.) [hereinafter Allprint] and see Hayek, supra, note 4 at 598-99. 48 (1984), 7 O.A.C. 321 (Div. Ct). 49 Supra, note 47. 5o Italics added. 51 (1985), 31 B.L.R. 124 (Ont. Dist. Ct). 12 Supra, note 47. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 signing the note, Starr warranted that the corporation, on whose behalf he was signing, was in existence and that he had the authority to sign on its behalf. Therefore, he was found liable for the breach of this warranty. The final issue was whether unjust enrichment resulted. It was held that the money was paid under a mistake of fact, that is, the non-existence of the corporate maker of the note resulted in the unjust enrichment of the defendant. In assessing damages, the Judge quoted Waddams, THE LAW OF DAMAGES, 53 to the effect that damages against the purported agent would be measured by what the plaintiff would have in fact gained, if the agent actually had had the authority warranted. Since the corporation, on whose behalf the defendant purported to act, was solvent although dissolved, the defendant was held liable for the amount of the note. The factually complicated case of Armand v. Checotel Finance Corp.5 4 raised two issues: endorsement on behalf of a company and absence of consideration. Western Development Corporation was a payee of three promissory notes made by Checotel. It was agreed that

Western would endorse these notes in favour of Banque Claridien, for 1989 CanLIIDocs 26 credit to the plaintiff's account, in order to satisfy Western's debt to the plaintiff. The endorsements were as follows: "Pay to the order of Banque Claridien for credit to the account no. 3479 (signed) E. Oliguibel". It should be noted that the name of the payee-endorser, Western Corporation, was not included in the endorsement. O'Connor J. found that, owing to the unique nature of the case, precedents were of little assistance, but he followed the general principle of Lindus v. Melrosen55 which held that where there is anything on the face of the instrument which creates any ambiguity, then evidence of all the circumstances of the instrument is admissible. He then admitted extrinsic evidence which led to the conclusion that Mrs. Oliguibel signed on behalf of Western Development Corp., of which she was president.5 6 Therefore the plaintiff was entitled to payment of the notes from Checotel. Electrical Distrib. Ltd v. Far East Entertainment Co.57 is an interesting case where a cheque was held to be a company cheque even though the company's name was not on the cheque. Video East was a partnership conducting a retail video outlet business. It was later incorporated as Far East Entertainment Co., but the company continued doing business under the name "Video East". Some 2,000 cheque forms with the printed words "Video East" appearing above the line

53 S.M. Waddams, THE LAW OF DAMAGES (Toronto: Canada Law Book, 1983) at 324-27. - (1985), 31 B.L.R. 203 (Que. Sup. Ct). 55 (1857), 2 H. & N. 293, 157 E.R. 121 (Ex. Div.); (1858), 3 H. & N. 177, 157 E.R. 434 (Ex. Div.). 56 For a discussion of the second issue, see infra, CONSIDERATION, Part IV. 57 (1986), 68 N.B.R. (2d) 153, 175 A.P.R. 153 (Q.B.). 1989] Bills of Exchange designated for the signature were used by Far East Entertainment Company. Between 25 to 30 such cheques were given to the plaintiff in payment of the accounts of the Far East Entertainment Company. When the last of these cheques was returned N.S.F., the plaintiffs brought an action against McLean, a shareholder of Far East Enter- tainment Co. and a partner of "Video East," whose signature appeared under the printed name of the Far East Entertainment Co., alleging that he was personally liable. The issue was whether the N.S.F cheque was McLean's personal cheque, a cheque of the Far East Entertainment Co. or one of the "Video East" partnership. The Court, following H.B. Etlin Co. v. Asselstyne58 and J.D.F.Builders Ltd v. Albert Pearl (Mgmt) Ltd59 held that extrinsic evidence was admissible to resolve the ambiguity. Upon reviewing the relevant evidence, the Court found that the N.S.F cheque was a cheque of the Far East Entertainment Company. What makes this case interesting is that extrinsic evidence was used to fasten the liability of a drawer on a person whose name, that is, the Far East Entertainment Company, did not even appear on

the cheque. This judgment reflects the realities of the situation, since 1989 CanLIIDocs 26 both parties (the plaintiff at least up until the time of dishonour) considered the 25 to 30 cheques to be those of the Far East Entertain- ment Company. However, it disregards the requirements of section 17, that the bill must be signed by the drawer, and of section 131, that no person shall be liable on the bill who has not signed it. In Harbour City Credit Union v. Simson6° the New Brunswick Court of Queen's Bench adopted a stricter approach in determining the liability on a note. Simson applied to the Credit Union for a loan. He was not a member of the Credit Union, but his wholly-owned company was a member. He signed the application in his own name and personally signed a promissory note. The only reference to his company was the company's account number on the note. The loan was paid into that account. Not surprisingly, the Court held that the note was Simson's personal note. Greater latitude was shown in Canadian Imperial Bank of Com- merce v. Dene Mat. Constr. Ltd6l Several promissory notes on a standard form provided by the bank were signed by two officers of the company. The signatures were above the name of the company but "Ltd" was omitted. The Court held that there was sufficient ambiguity on the face of the note to admit extrinsic evidence in order to determine who had made the note. It was held that the typed words, "Dene Mat Construction" (under the signatures of the two officers), were a clear

58 [1962] O.R. 810, 34 D.L.R. (2d) 191 (C.A.). This case was also followed in a recent English Court of Appeal decision in Bondina Ltd v. Rollaway Shower Blinds Ltd (1985), [1986] 1 W.L.R. 517, [1986] 1 All E.R. 564 (C.A.). 59 (1974), [1975] 2 S.C.R. 846, 49 D.L.R. (3d) 422. 60 (1986), 68 N.B.R. (2d) 430, 175 A.P.R. 430 (Q.B.). 61 Supra, note 21. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1

indication, understood and accepted by the bank, that the two officers were signing in a representative capacity. The Court observed in passim, that although it was an offence under the Companies Act to omit the word "Limited" or its abbreviation from the company's name, it did not make void transactions carried out under an incomplete name; nor would it invalidate the promissory note.

III. DELIVERY

One of the issues in First National Bank of Oregon v. A.H. Watson Ranching Ltd62 was whether a promissory note was delivered subject to condition. Paragraph 40(l)(b) provides that delivery may be conditional or for a special purpose only. The effect of this provision is that any party to a bill may, in defence to a claim against him or her, show that the item was delivered by him or her [solely on a conditional basis]. This defence is available even where the plaintiff

was not an original recipient, as long as he or she is not a holder in 1989 CanLIIDocs 26 due course. 63 In this case, the defendant, Watson, executed a promissory note payable to Thompson, a cattle exporter, who endorsed it to the plaintiff bank to finance for Watson the purchase of cattle. The note was undated and the defendant alleged that the delivery to Thompson was subject to a condition that the note would be dated upon payment by Thompson to the seller of the cattle. It was argued that this condition was not met, since the note was dated upon shipment of the cattle, at which time the seller was not paid in full. Thus, the note was not binding on the defendant. The Court found on the evidence that there was no condition imposed by the defendant in issuing the note to Thompson but, rather, only a statement of intention.

IV. CONSIDERATION

In Armand v. Checotel Finance Corp.64 promissory notes drawn by the defendant were restrictively endorsed by the payee, Western Development Corp., to Banque Claridien for credit to the plaintiffs account in satisfaction of Western's indebtedness to the plaintiff. The Court held that the defence of lack of consideration for the endorsement by Western in favour of Banque Claridien could not be raised by Checotel, who was a remote party to such endorsement. Further, the defence could only be raised against the plaintiff, since Banque Clar- idien acted only as an agent for collection on behalf of the plaintiff.

62 Supra, note 2. 63 B. Crawford, CRAWFORD & FALCONBRIDGE: BANKING AND BILLS OF Ex- CHANGE, 8th ed. (Toronto: Canada Law Book, 1986) at 1312 [hereinafter CRAWVFoRD & FAiCONBRIDGE]. 64 Supra, note 54. 1989] Bills of Exchange

The defence of lack of consideration did not succeed in Keton Land Corp. v. Hansen Hldg. Ltd65 Thompson, the sole shareholder in Keton, advanced money to King, a sole beneficial owner of Hansen. When $40,000 remained unpaid, Thompson asked for payment or security. Hansen gave a promissory note for that amount in favour of Keton. King went bankrupt and, in an action by Keton on the promissory note, Hansen alleged lack of consideration. Following J.D.F. Builders Ltd v. Albert Pearl (Management)Ltd66 Errico Co. Ct J. held that under paragraph 53(1)(b) an antecedent debt or liability may constitute valuable consideration for a bill of exchange. According to Currie v. Misa67, a leading authority on the topic, consideration may consist of some forbearance, detriment, loss, etc. undertaken by the promisee and does not have to move to the promissor. The forbearance by Thompson not to press his claim against King was sufficient consideration. Although not alluded to in the judgment, the learned Judge, in arriving at his decision, either lifted the corporate veil by considering the actions of the sole owners to be the actions of the corporate entities or he treated the corporate entities as agents of their 1989 CanLIIDocs 26 owners.

V. INCOMPLETE INSTRUMENT

The rather uncommon case of the liability of an endorser of an incomplete promissory note was the subject of Royal Bank of Canada v. Young. 68 In this case the defendant endorsed two blank promissory notes at the request of the maker to be used solely for the accommodation of Sonnet Investments Ltd, a company in which both the endorser and the maker of the notes had interest. The notes were used for the personal benefit of the maker and the defendant denied liability to the Royal Bank, the payee of the notes. Although the defendant was clearly an accommodation party, the case was decided on the issue of incomplete instruments. Sections 31 and 32 provide that a signature on an incomplete instrument can be used as that of the drawer, acceptor or endorser. It can also authorize the completion of the instrument by any party to it if done within a reasonable time and strictly in accordance with the authority given. However, where such instrument is negotiated to a holder in due course after completion, that holder may enforce it as if it had been filled up within a reasonable time and in accordance with the authority given. In the case at bar the Court held that the plaintiff bank had prima facie authority to complete the blank notes when it received them from the maker, but the filling up was in breach of the conditions imposed by the endorser. As the bank

65 (1987), 15 B.C.L.R. (2d) 159 (Co. Ct). 66 Supra, note 59. 67 (1875), L.R. 10 Ex. 153. 68 (1985), 62 A.R. 107, 38 Alta L.R. (2d) 404 (Q.B.). Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 received the notes while they were incomplete, it was not a holder in due course 69 and could not enforce the notes against the endorser. The Court referred to the trial judgment of Riley J. in Imperial Investment Corp. Ltd v. Mazur,70 but did not mention the affirming judgments of the Appellate Division of the Alberta Supreme Court7' and of the Supreme Court of Canada.72

VI. HOLDERS Whether "constructive possession" of a note without endorsement can constitute holding was considered in Bank of British Columbia v. Coopers & Lybrand Ltd73 Individual investors, to obtain tax advantages under a "MURB" scheme, issued promissory notes payable to Com- munity Builders Ltd in order to participate in the development of residential buildings. Community obtained financing from the bank of British Columbia and in a separate document assigned these notes to the bank. The notes themselves, however, were never delivered to the bank nor endorsed by Community. Subsequently, Community was 1989 CanLIIDocs 26 placed into receivership (Coopers & Lybrand Ltd were the receivers) and the bank claimed, as holder of the notes, against the makers (the individual investors) of the notes. MacDonald J. dismissed the action on the grounds that the bank could not be a holder of them, as they were not bearer notes and the bank was neither payee, endorsee nor possessor of them.74 Although the bank had taken an assignment of the debts due to Community from investors, as was evidenced by the notes, Community did not negotiate the notes to the bank. Therefore, MacDonald J. concluded that subsection 61(1), which deals with "transfers by delivery without endorsement", was not applicable because the bank was not a transferee within the meaning of the section, as "actual delivery of possession is required where there has been no endorsement". 75 No authority is cited for this proposition nor does there appear to be any reference to it in the standard texts. 76 Whether a counterclaim for unliquidated damages is a valid defence against a holder not in due course of a cheque was considered in Iraco Ltd v. Staiman Steel Ltd77 Staiman purchased steel tubes from

69 Compare s. 56(1). 70 (1961), 37 W.W.R. 395 (Alta S.C.T.D.). 71 (1962), 33 D.L.R. (2d) 763 (Alta S.C.A.D.). 72 [1963] S.C.R. 281, 39 D.L.R. (2d) 631. 73 Supra, note 11. - Compare definition of "holder" in s. 2. 75 Supra, note 11 at 98. 76 Compare CRAWFORD & FALCONRIDGE, supra, note 63 at 1503-5 and M. Megrah & ER. Ryder, BYLEs ON BILLS OF EXCHANGE, 24th ed. (London: Sweet & Maxwell, 1979) at 201-02 [hereinafter BYLEs]. 77 (1986), 54 O.R. (2d) 488, 27 D.L.R. (4th) 69 (H.C.) [hereinafter cited to O.R.], affd (1987), 62 O.R. (2d) 129, 45 D.L.R. (4th) 158 (C.A.). 1989] Bills of Exchange from Iraco and paid for them by cheque. The cargo arrived damaged and Staiman stopped payment on its cheque when advised that there could be problems with the insurance coverage. In an action by Iraco on the cheque, Staiman counterclaimed for unliquidated damages to the cargo. Holland J. referred to English authorities78 and held that the counterclaim for unliquidated damages was no defence between im- mediate parties. Although section 2 of the Canadian Bills of Exchange Act states that "defence" includes counterclaim, Holland J. followed statements in Rogers79 and Geva8o and concluded "the term 'counterclaim' in section 2 of the Bills of Exchange Act, is not extended to provide a defence where the counterclaim is for an unliquidated sum". 8' He then dealt with a counterclaim for a breach of warranty of quality of goods and equitable set-off. Authorities in England and Ontario have held that a counterclaim for unliquidated damages for breach of warranty of quality is no defence in an action. There is, however, no doubt that mutual debts may be set off. Relying on a passage in HALSBURY'S LAWS OF ENGLAND,82 Holland J. expressed the view that equitable set-off probably did not apply to bills of exchange. While 1989 CanLIIDocs 26 acknowledging that one Canadian case held otherwise,8 3 the weight of authorities in Canada, England and Australia supported his conclusion. To provide certainty in matters of international trade, it was preferable that the law of Canada should be the same as the law of England.

VII. LIABILITIES OF PARTIES

A. Accommodation Bill

An accommodation bill has been described as "a bill accepted or indorsed [sic] without value by the acceptor or indorser [sic] to accommodate the drawer, or some other party; i.e. that the party accommodated may raise money upon it, or otherwise make use of it".84 The liability of an accommodation party has been the subject of several recent cases. The liability of a wife who co-signed a promissory note for a loan to her husband was dealt with in Bank of Nova Scotia v. Tucker.85

78 Montecchi v. Shimco (U.K.) Ltd (1978), [1980] 1 Lloyd's Rep. 50 (C.A.) and Nova Jersey Knit Ltd v. Kammgarn Spinnerei Gmbtt, [1977] 2 All E.R. 463 (H.L.). 79 A.W. Rogers, FALCONBRIDGE ON BANKING AND BILLS OF EXCHANGE, 7th ed. (Toronto: Canada Law Book, 1969) at 620. so B. Geva, Equities as to Liability on Bills and Notes: Rights of a Holder Not in Due Course (1980-81) 5 CAN. Bus. L.J. 53 at 78. 81 Supra, note 77 at 491. 82 42 HALS., 4th ed., p. 265, para. 476. 83 Edcal Indus. Agents Ltd v. Redl (1966), 60 D.L.R. (2d) 289, 58 W.W.R. 527 (Alta. C.A.). 84 BYLES, supra, note 76 at 222. 85 (1984), 50 Nfld & P.E.I.R. 129, 149 A.P.R. 129 (Nfld Dist. Ct). Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1

The Court followed the rule expressed in Bank of Nova Scotia v. MacLellan86 and Mollot v. Monette87 that where, a wife co-signs a promissory note as a co-maker with her husband, she is an accommodation party within the meaning of section 55 and as such is liable to a holder for value. A payee of the note comes within the definition of a holder under section 2. In this case the payee (the plaintiff bank) gave value, that is, the loan. Therefore, it was a holder for value of the note and could enforce it against the accommodation party. Another case in which a husband and wife co-signed a promissory note is Caisse Populaire de Morinville v. Berube.88 Here, a husband and wife co-signed both a loan agreement, as co-borrowers, and a promissory note. However, the monies were advanced to the husband only. An application for summary judgment against the wife was dismissed by the Master because there was a triable issue as to whether there was any consideration flowing from the wife. It was held that if the defendant wife was a co-borrower, then the plaintiff was bound to establish consideration. Here, the payment was made to the husband only. Usually, payment is made to both in the case of co-borrowers. 1989 CanLIIDocs 26 Further, there was no direction given by the wife to pay only the husband, which would have constituted consideration on her part. Because the wife signed the loan agreement as a co-borrower, it would be difficult to consider her as an accommodation party. All of this leads to an interesting point. Where the lender has a spouse co-sign both a loan agreement and a relevant promissory note, then such a co- signing spouse would be considered a debtor (borrower) and not an accommodation party. If the advance is then made to only one of the co-signing spouses, the other spouse will not be liable on the promissory note for lack of consideration. An appeal from Canadian Imperial Bank of Commerce v. Robertshaw89 was dismissed by the Alberta Court of Appeal. 90 This was a case of a father who co-signed a promissory note to accommodate his son. Guaranty Trust Company of Canada v. Seller's Oil Field Service Ltd91 considered the liability of the accommodation party who endorsed a promissory note guaranteeing a debt of the maker of the note. Quoting from Re McDonnell Holdings Ltd and Redisco of Canada Ltd92 and Perry v. National ProvincialBank of England,93 the

86 (1980), 28 N.B.R. (2d) 709, 63 A.P.R. 709 (Q.B.) and see Hayek, supra, note 4 at 609-10. 87 [1981] 2 S.C.R. 133, 128 D.L.R. (3d) 577 and see Hayek, ibid. at 606- 07. 88 (1985), 67 A.R. 382 (Q.B.). 89 (1984), 54 A.R. 315, [1984] A.W.L.D. 817 (Q.B.), commented upon in Hayek, supra, note 4 at 611. 9 (1985), 61 A.R. 192, 45 Alta L.R. (2d) 256 (C.A.). 91 (1984), 55 A.R. 348 (Q.B.). 92 (1963), 38 D.L.R. (2d) 646, [1963] 41 W.W.R. 696 (Alta C.A.). 93 [1910] 1 Ch. 464 (C.A.). 1989] Bills of Exchange

Court held that by electing to seize the truck purchased under a conditional sales contract, the plaintiff could not claim any deficiency from the surety, because his action had the effect of prejudicing the surety in the exercise of his rights against the principal debtor. The surety was therefore released. The Court, referring to FALCONBRIDGE ON BANKING AND BILLS OF EXCHANGE 94 and CHALMERS ON BILLS OF EXCHANGE, 95 held that these same rules apply to an accommodation party who is also a surety. Edmonton Savings and Credit Union Ltd v. Brown96 dealt with a similar issue. The defendant co-signed a promissory note as security for a loan to her son and daughter-in-law. She also gave the credit union a mortgage on her house as additional security. Later, the loan agreement between the credit union and the couple was amended without the defendant's knowledge. Feehan J. held that the defendant would have been liable as an accommodation party but because the principal contract was altered, which affected the rights of the guarantor, the defendant was no longer liable on the promissory note. In

support of his conclusions Feehan J. quoted from ROWLA'Ir ON PRIN- 1989 CanLIIDocs 26 CIPLE AND SURETY97 and referred to Greenough v. McClelland,98 where the facts were very much the same.

B. Liability of Guarantor

In Scholefield Goodman & Sons Ltd v. Zyngier99 the Privy Coun- cil, on an appeal from the decision of the full court of the Supreme Court of Victoria, Australia, considered the question of whether a general guarantee of debts owing by the principal debtor extends to the debtor's liability under a bill of exchange. By a mortgage executed in favour of the Commercial Bank of Australia, Mrs Zyngier agreed, inter alia, to pay the bank all other sums owing by her or by Zinaldi & Co. Pty Ltd including any sums owing (primarily or secondarily) in respect of bills of exchange discounted by the bank. The issue concerned five bills drawn by the plaintiff, Scholefield Goodman, on Zinaldi to finance the import of goods by Zinaldi. The bills were accepted by Zinaldi and discounted by the bank. At maturity, the bills were dishonoured by Zinaldi. Upon the request of the bank, Scholefield Goodman (the drawers of the bills) paid these bills. They then claimed contribution from Mrs Zyngier on the basis that they and Mrs Zyngier

94 Supra, note 79. 9S D.A. Smout, CHALMERS ON BILLs OF EXCHANGE, 13th ed. (London: Stevens & Sons, 1964) at 225. 96 (1986), 62 A.R. 20, 44 AIta. L.R. (2d) 310 (Q.B.). 97 J. Rowlatt, ROWLATr ON PRINCIPAL AND SURETY, 4th ed. (London: Sweet & Maxwell, 1982) at 3. 9s (1860), 2 El. & El. 429, 30 L.J.Q.B. 15. 99 [1985] 3 W.L.R. 953 (P.C.), affg [1984] V.R. 445. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1

were co-sureties of these dishonoured bills. They further claimed to be subrogated to the fights of the bank as mortgagee to secure the payment of the contribution claimed. The fundamental question was whether, upon the true interpretation of the mortgage containing the guarantee between Mrs Zyngier and the bank, she placed herself (as regards the bills of exchange accepted and subsequently dishonoured by Zinaldi) in the position of a co-surety alongside the drawer or endorser of the bills, or whether her liability to the bank was limited to a case of default by the parties liable on the bill. The Privy Council concluded that if a third party (in this case Mrs Zyngier) guarantees a bill of exchange for the benefit of a bank which discounts it, the normal understanding will be that the surety guarantees that the payment will be made by one of the parties liable on it, that is, the acceptor, the drawer or the endorser. It would not be the normal understanding that the surety intends to become answerable with the drawer upon the default of the acceptor. There was no reason to suppose that, by reason of the guarantee given to the bank by Mrs

Zyngier, she desired to confer benefit on the drawer and share with 1989 CanLIIDocs 26 him the responsibility for a dishonoured bill. C. Notes and Mortgages

Provisions found in various law of property acts, to the effect that in any action on an agreement for sale of land the right of the vendor is restricted to the land to which the agreement relates, may affect the validity of a bill or note.1°° Provincial Mortgage Exchange Inc. v. Quitely 101 is a case which dealt with this problem. The defendants purchased land for $20,500 cash down payment and balance by monthly instalments. The vendor lent the buyers $18,000 for which the buyers gave a promissory note. The vendor then assigned the note to the plaintiffs. The Master held that there were two different transactions: a sale of land and a loan of money. The promissory note referred to the loan for the down payment only and was not a repetition of the covenant in the agreement for the sale of land. Therefore a summary judgment was issued to the plaintiffs. On the other hand, in New Community Savings and Credit Union Ltd v. Wilson,o2 where one of the defendants signed a promissory note and covenanted a mortgage in favour of a credit union, Walker J. held that there was just one debt, and the promissory note was collateral to the mortgage. The legal effect of an action on the note would be an action to recover a debt incurred under the mortgage.

100 Compare Law of Property Act, R.S.A. 1980, c. L-8, s. 49(2) and see Hayek, supra, note 4 at 610-11. 101(1986), 43 Alta L.R. (2d) 246 (Q.B.M.C.). 102 (1987), [1988] 1 W.W.R. 117 (Sask. Q.B.), Walker J. 1989] Bills of Exchange

VIII. DEFENCES

A. Forgery

A forged or unauthorized signature is wholly inoperativeo3 and a "bill" on which the drawer's signature was forged is not a bill of 0 exchange. 1 4 Forgery by a holder of a power of attorney was considered in Public Trustee v. Byers. 10 5 The action was taken by the Public Trustee against the bank to recover the value of forged cheques cashed by the bank. Mrs Armstrong was an elderly widow and an alcoholic who was sometimes confused. She executed a power of attorney provided by the bank and a general power of attorney in favour of Byers, a taxi driver, who ingratiated himself to her. She was last heard from by her relatives on July 13, 1981. On July 21, 1981, Byers presented at the bank two cheques, purportedly signed by Mrs Arms- trong, totalling over $50,000 and demanded cash. He said he wanted cash for a real estate transaction he was handling for Mrs Armstrong in Reno, Nevada. The bank checked Mrs Armstrong's signature and 1989 CanLIIDocs 26 Byer's power of attorney and cashed the cheques. It was subsequently found that the signature on the cheques was not that of Mrs Armstrong. The issue before the Court was whether the forged signature of a person who has given a power of attorney to the forgerer affects the validity of the bill so forged. Counsel for the bank argued that Byers, by virtue of his power of attorney, had authority to present a cheque signed by him either in his own name or in Mrs Armstrong's name and that it was immaterial that he copied her signature. In support of his argument, counsel quoted several authorities and a statement in the 7th edition of FALCONBRIDGE ON BANKING AND BILLS OF EXCHANGE. 106 Hutchinson L.J.S.C. did not accept this argument as a correct interpretation of section 9. In his view, the section contemplated two situations in which the signature would be wholly inoperative: the first would occur where the signature was forged, the second where the signature was unauthorized. While Byers had authority to write cheques for Mrs Armstrong, he did not rely on this authority, but rather simply forged her signature. Once the forgery is established the instrument is a nullity. The authority to sign a person's name or to sign on his or her behalf is relevant only when the issue concerned is an unauthorized signature. Byer's authority to sign Mrs Armstrong's name did not allow him to forge her signature. Hutchinson L.J.S.C. also found in the alternative that the bank was negligent in cashing the cheques

103 S. 49. 104 Arrow Transfer, supra, note 40. 1o5 (1986), 2 B.C.L.R. (2d) 15 (S.C.). 106 Ibid. at 21. A statement of similar effect appears in CRAWvFoRD & FALCON- BRIDGE, supra, note 63 at 1355-66 (Public Trustee v. Byers did not come to the attention of the author.). Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 without proper inquiry. There were several unusual circumstances: the amount of the cheques, the requirement of cash for a settlement in the United States, the bank's knowledge of Mrs Armstrong's condition and so on.

B. Non Est Factum

Although the leading authority on non est factum,10 7 Foster v. Mackinnon,108 concerned the signing of a promissory note by mistake, it is a rare instance when a plea of non est factum in connection with a promissory note is raised before the courts. Prince Albert Credit Union v. Diehl'09 is one of those cases. Mrs Diehl signed a promissory note in her own name, although she believed she was signing on behalf of a company of which she was the sole surviving shareholder. Her plea of non est factum did not succeed. Geatros J. found that she was well aware of the kind of document she was signing, as she had executed promissory notes before. She was a person of full age and capacity who simply did not exercise sufficient care in signing the 1989 CanLIIDocs 26 instrument. Applying Saunders v. Anglia Building Society"o and Marvco Color Research Ltd v. Harris"' Geatros J. held that Mrs Diehl was prevented by her carelessness from pleading that her mind did not follow her pen. The Court, however, ordered the rectification of the instrument to indicate that the defendant signed in a representative capacity. There was uncontradicted evidence that the managing director of the plaintiff, who prepared the promissory note, was aware that Mrs Diehl had no intention of signing a personal note and must have known of the mistake. The case was thus one of unilateral mistake and not of non est factum.

C. Material Alteration Where a bill has been materially altered, it is void except as against the party who has him or herself made, authorized or assented to the alteration." 2 What amounts to a material alteration was considered in Bank of Nova Scotia v. Guenette." 3 The amount of the cheque was expressed in words as fifty thousand, but the amount in figures had been altered to reflect this fifty thousand. This alteration was

'07 For a discussion of the plea of non est factum see E. Hayek, Recent Developments in the Law of Contracts (1983) 15 OTrAWA L. REV. 599 at 614. 108 (1869), L.R. 4 C.P. 704, 38 L.J.C.P. 310. 109 (1987), 57 Sask. R. 173, [1987] 4 W.W.R. 419 (Q.B.). 110 (1970), [1971] A.C. 1004, [1970] 3 All E.R. 961 (H.L.), affg (sub nom. Gallie v. Lee) [1969] 1 All E.R. 1062 (C.A.). 111 [1982] 2 S.C.R. 774, 141 D.L.R. (3d) 577. 112 S. 145. 113 (1986), 68 A.R. 368, 49 Alta. L.R. 408 (Q.B.). 19891 Bills of Exchange initialled by the drawer. Although the general rule is that any alteration of the sum payable is a material alteration,11 4 the Court held that in this case, the alteration was not material, because where there is a discrepancy between the amounts in words and figures, the amount in words is payable." 5 Consequently, the alteration of the numerical sum was not a material alteration and the cheque was not avoided. The Court further held that the drawee bank was not negligent in paying the cheque as the amount in words was clearly stated and the numerical alteration was duly initialled. Undoubtedly the Court also took into consideration the fact that the maker of the cheque had informed the bank in advance that a $50,000 cheque was forthcoming and that he wanted it honoured.

IX. CHEQUES

A. Depository Bank as a Holder in Due Course

The controversial amendment to the Canadian Bills of Exchange 1989 CanLIIDocs 26 Act,116 enacted in 1966, inserted a new subsection 3 to section 165. This subsection provides that where a bank credits a customer's account with a cheque presented for collection, it becomes a holder in due course. Recently it was subject to a thorough analysis in Toronto Dominion Bank v. Jordan."7 Lambert J.A., delivering the judgment for the British Columbia Court of Appeal, considered the interpretation of subsection 165(3). Read literally, all that is required of the depository bank to become a holder in due course is to credit a person's account with the cheque deposited.118 Lambert J.A. expressed the view that as a matter of law the depository bank would not become a holder in due course unless it had received a cheque for deposit and had deposited it in good faith. Although not explicit in subsection 165(3), Lambert J.A. interpreted subsection 165(3) as requiring "good faith". He based this interpretation on the legislative history of the amending Act, the reading of the Bills of Exchange Act as a whole and, in particular, on the relationship which must exist between sections 56- 59 (which define holding in due course) and subsection 165(3). He also referred to the judgment in Bank of Montreal v. Lasqueti Fishing Co." 9 where the Court of Appeal affirmed the findings at trial, namely, that a bank becomes a holder in due course when it has credited a cheque "as long as it did so in good faith". 20 In Lasqueti, the good

14 S. 146. 115 S. 28(2). 116 An Act to Amend the Bills of Exchange Act, S.C. 1966-67, c. 12, s. 4, and see Hayek, supra, note 4 at 616-19. "7 (1985), 61 B.C.L.R. 105 (C.A.), rev'g (1984), 53 B.C.L.R. 63 (S.C.). 118 S. 165(3). 119(1982), 43 B.C.L.R. 273, [1983] 4 W.W.R. 549 (C.A.). 120 Ibid. at 279. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 faith requirement was conceded by the plaintiff and not reserved for argument in the Court of Appeal. Thus, the analysis by the learned Judge amounts to obiter dicta. In Jordan, Lambert J.A. then examined the meaning of "good faith". He referred to a number of precedents and subsection 3 and drew two conclusions: firstly, the total relationship between the parties must be considered; secondly, the requirement of good faith will not be satisfied where, in the context of the total relationship, facts are actually known to the prospective holder which either actually cause suspicion to arise or which should cause suspicion in any normal person and the suspicion is suppressed by the holder, unless the supression is an act of carelessness and not dishonest. Applying this test, Lambert J.A. overruled the trial Judge in finding that the bank manager did not act in good faith. In summary then, the judgments of the British Columbia Court of Appeal in Bank of Mont- real v. Lasqueti Fishing Co.121 and Toronto Dominion Bank v. Jor- dan,122 which interpret subsection 165(3) as requiring good faith, and the judgment of the Ontario High Court in Morguard Trust Co. v.

Bank of Nova Scotia,12 3 which held that there must be a valid delivery 1989 CanLIIDocs 26 to establish a person as a holder in due course within the meaning of that section, have gone a long way to place the amendment, which was once described as "subvert[ing] the structure of the Bills of Exchange Act,"124 into the proper context of the Act. The necessity of valid delivery was also emphasized in Gough Electric Ltd v. CanadianImperial Bank of Commerce.125 Gough Elec- tric and Harrington Electric, a supplier and a subcontractor, were payees of a cheque drawn on C.I.B.C. The president of Harrington Electric, R.W. Harrington, took the cheque to the offices of Gough Electric, where an employee put a stamp on it restrictively endorsing it for deposit only to the account of Gough Electric at the Toronto Dominion Bank. Notwithstanding this endorsement, Harrington deposited the cheque to the credit of Harrington Electric at a branch of the Bank of British Columbia. In due course the cheque was paid by the C.I.B.C., collected by the Bank of British Columbia and Gough Electric received nothing. The trial Judge held the Bank of British Columbia liable for the negotiation of the cheque for the benefit of one payee without the consent of the other payee. The Court of Appeal dismissed the appeal. Hutchison J.A., speaking for the Court, held that the Bank of British Columbia was not a holder in due course

121 Supra, note 119. 122 Supra, note 117. 123 (1982), 40 O.R. (2d) 211 (H.C.), affd 44 O.R. (2d) 384 (C.A.) and see Hayek, supra, note 4 at 613-14, 618-19. 124 S.A. Scott, The Bank is Always Right: Section 165(3) of the Bills of Exchange Act and its Curious ParliamentaryHistory (1973) 10 McGLL L.J. 78 at 78. 125 (1986), 7 B.C.L.R. (2d) 39 (C.A.). 1989] Bills of Exchange

within the meaning of subsection 165(3) because of the absence of valid delivery. Subsection 165(3) requires delivery of a cheque to the bank for deposit. A cheque is not "delivered" merely by handing it over to the teller. Delivery means transfer of possession.126 In order to be effectual, delivery must be made by the autho-ity of the drawer, acceptor or endorser, as the case may be. 127 Where there are two or more payees or endorsees, all must endorse.128 The stamped endorsement by Gough Electric was of no effect, as it was a restrictive endorsement to Gough's account at the Toronto Dominion Bank, and so far as the Bank of British Columbia was concerned, there was no endorsement by Gough. As both payees were required to endorse, the cheque was not "delivered" to the Bank of British Columbia and it could not therefore become a holder in due course within the meaning of subsection 165(3). A depositary bank was held to be a holder in due course in Bank of Nova Scotia v. Westplain Insurance Management Inc. 29 In this case, the Kuklica brothers drew a cheque payable to Westplain and two

other payees and deposited it to the account of Westplain at the Bank 1989 CanLIIDocs 26 of Nova Scotia. The payment of the cheque was stopped but in the meantime the Bank of Nova Scotia allowed Westplain to draw on the cheque deposited, thus creating an overdraft. Westplain was subsequently dissolved. The Bank of Nova Scotia claimed the amounts of the cheque from the Kuklica brothers as a holder in due course. Hirschfield J. referred to sections 56-58 and subsection 165(3) and held that the bank was a holder in due course and entitled to enforce payment against the Kuklica brothers. The Judge did not give reasons as to why the bank was a holder in due course; presumably it was one under subsection 165(3) and also according to common law as a collecting bank which allows a customer to withdraw the amounts of the cheques before they are cleared.130 Hirschfield J. held further that the attempt to collect the stopped cheque from the other two payees did not preclude the claim against the drawer.'31

B. Payment Over Countermand

When a bank overlooks a countermand and pays the cheque, a payment under a mistake of fact occurs. The principles governing the

126 S. 2. 127 S. 40(1). 128 S. 63(2). 129 (1985), 38 Man. R. (2d) 89 (Q.B.). 130 Compare CRAWFORD & FALCONBRIGE, supra, note 63 at 1446-47 and BYLES, supra, note 76 at 266-67. '3' The principle that a collecting bank does not cease to be a holder in due course by attempting to collect a dishonoured cheque from a client was also stated in Royal Bank of Canada v. Wild (1974), 51 D.L.R. (3d) 188 (Ont. C.A.). This case was not referred to in the judgment. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 recovery of a cheque from the payee who was paid under a mistake of fact were formulated by Goff J. (as he then was) in the learned judgment Barclays Bank Ltd v. W.J. Simms Son & Cooke (Southern) Ltd132 The reasoning in Barclays Bank was applied by the Ontario High Court in Royal Bank of Canada v. LVG Auctions Ltd133 An appeal from that judgment was dismissed with costs by the Court of Appeal. 134 It follows that the precedent of Barclays Bank is now well established in Ontario, but different considerations apply in Saskatchewan.135

C. Banker-Customer Relationship 1. Clearing a Cheque The timeliness of dishonour of a cheque was one of the several issues dealt with in the factually complex case, Caisse Populaire D'Alfred Ltie v. Lapensjel36 Two lottery ticket distributors, each a customer of a different Caisse Populaire, practised a cheque kiting scheme. The customers were allowed to draw on uncleared balances 1989 CanLIIDocs 26 in their accounts. As the clearing process, done through the agency of the Royal Bank branches in Ottawa, took some time, the two lottery dealers, by exchanging and depositing cheques drawn by them on their accounts, had the use of the amounts of these cheques for a period of time. When the kiting scheme was discovered, the Civil Service Co- operative Credit Society dishonoured a batch of cheques drawn on it. These cheques were drawn by one of the distributors, Monette, on his account with the Co-operative, and issued to the other distributor, Lapensde, who deposited them at the Caisse Populaire D'Alfred. One of the issues that arose in this case was whether the Co-operative dishonoured the cheques in a timely fashion. In the first instance, the Court held that as the Co-operative was not a bank, 137 the "cheques" were not cheques within the meaning of the Act, but rather, were bills of exchange. If the Co-operative, as a drawee of the bill, did not accept these bills, it did not incur any liability on them. 38 Since the Co-operative never did accept them, it was under no obligation to give a notice of dishonour by non-acceptance. Saunders J. referred to section 80 and Duncan & District Credit Union v. Greater Victoria Savings Credit Union.1 39 This finding by Saunders J. could have ended the

132 [1979] 3 All E.R. 522 (Q.B.) and see Hayek, supra, note 4 at 620-21. 133 (1983), 43 O.R. (2d) 582 (H.C.). 134 (1984), 47 O.R. (2d) 800 (C.A.). 135 Hayek, supra, note 4 at 620-22. 136 (1985), 31 B.L.R. 28 (Ont. H.C.). 137 Ibid. at 44. 138 Ibid. 139 [1978] 3 W.W.R. 570 (B.C.S.C.). 1989] Bills of Exchange matter, but as these institutions were performing services similar to those provided by chartered banks, he further considered the issue presuming that the instruments were cheques within the meaning of the Act. He stated that normally a cheque would not require acceptance by the drawee bank and that the Act did not prescribe any time limit for dishonour after presentment. Notice of dishonour, to be valid and effectual, must be given not later than the day following the dishonour, according to subsection 97(a). Section 103, which also deals with the notice of dishonour, does not prescribe the time for giving notice, but rather provides that notice given in a certain manner within a certain time will be deemed sufficient. With respect to the question of how much time a drawee has to decide whether or not to honour the cheques, Saunders J. thought that the drawee would be entitled to a reasonable amount of time to review the cheques in order to have access to the necessary data and to consult the customer if there were not sufficient funds. The clearing rules provided for two days including the day of arrival, which appeared to be reasonable. The clearing of cheques between the Caisse Populaire and the Co-operative was ef- fected through the services of the Ottawa branches of the Royal Bank. 1989 CanLIIDocs 26 It was held that delivery of the cheques by the Caisse Populaire to the Royal Bank was not a presentment for payment because under section 88, the proper place for presentment is the address of the drawee given on the bill. Therefore the presentment occurred when the cheques in question were actually received by the Co-operative. Mak v. Bank of Nova Scotia140 is a peculiar case where the holder of a dishonoured cheque asked the local branch manager to clear the cheque so as to have it returned with a notice of dishonour stamp, even though the drawer's account had been closed. The manager obliged on the understanding that the amount of the cheques, credited to Mak's account when the cheque was deposited, would not be withdrawn. Notwithstanding this understanding, Mak withdrew the funds and refused to reimburse the bank, which in turn reimbursed itself out of Mak's savings account. Mak brought an action against the depository bank, based on sections 96 and 97 of the Act, asserting that the bank should have refused to accept the notice of dishonour because of lateness. Mifflin C.J.N. saw no merit whatsoever in this submission. In essence the bank dealt with two worthless cheques in a manner specifically requested by Mak. It was ludicrous for Mak to assert that he should be rewarded by the bank because of the delays in the clearing system. Mifflin C.J.N. expressed the view that the cheques could not be categorized as ordinary bills of exchange and the bank as a holder in due course. The whole transaction was not an ordinary process of negotiation and clearance.

1- (1985), 58 Nfld & P.E.I.R. 252, 174 A.P.R. 252 (Nfld C.A.), affg (1983), 45 Nfld & P.E.I.R. 322, 132 A.P.R. 322 (Nfld S.C.T.D.). Also, see Hayek, supra, note 4 at 624-25. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1

National Bank of Greece (Canada) v. Canada Permanent Trust Co.141 is a rare case where one member institution of the Canadian Payments Association sued another member institution over a delay in clearing a cheque. A number of cheques drawn by G.B. Farons Inc. on Canada Permanent Trust Co. payable to 125445 Canada Inc. were deposited by the payee to its account with the National Bank of Greece. Both the payee bank branch and the drawee institution branch were located in Montreal. The cheques went through the usual clearing process, but the drawee institution held them for periods ranging from four to eight days before their dishonour and return to the payee bank. The manual of the Canadian Payments Association provided in section 4 that the items should have been returned not later than the business day following receipt by the drawer branch. In the period between the deposit of the first cheque and the return of the first dishonoured cheque, the payee bank allowed the customer to withdraw $126,000 on the account. The customer subsequently went bankrupt. Conse- quently, the National Bank of Greece sued Canada Permanent Trust

Co. for loss caused by the trust company's negligence, and for breach 1989 CanLIIDocs 26 of its contractual obligations as a n.c mber of the Payments Association in not returning the cheques promptly after receipt. Brossard J. held that the regulations of the Canadian Payments Association were con- tractually binding on the participants and imposed a duty of care. He held further that the rules were binding on all participants, even if they were not full members. When a participant benefits from the advantages of the clearing process, it also has to be subject to its obligations. The fact that the rules did not provide for any civil liability in a case of breach did not prevent the application of general law. 2. Forgery and Chequing Accounts The importance of the Supreme Court of Canada's long awaited decision in Canadian Pacific Hotels Ltd v. Bank of Montreal42 goes beyond the narrow limits of the law of negotiable instruments and their technical aspects. The general issue in CP Hotels concerned the contractual relationship between the bank and the customer. The spe- cific issues included the customer's duty of care in drawing a cheque, the legal effects of bank statements and whether there was any incum- bent duty on the customer to establish a proper system of accounting and internal control. The judgment also went beyond the law of negotiable instruments. It contained an exposition of the implied terms in contracts, re-affirmed and, at the same time, further restricted the

141 [1987] R.J.Q. 607 (Sup. Ct). 142 [1987] 1 S.C.R. 711, 40 D.L.R. (4th) 385, rev'g (1982), 139 D.L.R. (3d) 575 (Ont. C.A.), affg (1981), 32 O.R. (2d) 560, 122 D.L.R. (3d) 519 (H.C.) [hereinafter CP Hotels cited to S.C.R.]. For comment on the judgment, see E. Hayek, Canadian Pacific Hotels Ltd v. Bank of Montreal (1988) 15 CAN. Bus. L.J. 361. 19891 Bills of Exchange concurrent liability in contract and tort, and followed the conservative trend evident in recent judgments of common law courts. Our interest here is the effect that this judgment has on the law of negotiable instruments. The dominant issue on appeal was whether the traditionally narrow scope of the duty of care owed by a customer to the bank in respect of prevention and detection of forgery in the drawing of a cheque (the so-called Macmillan doctrine) should be extended. This doctrine was formulated in London Joint Stock Bank Ltd v. Macmillan143 in 1918 and includes the duty of a customer to use reasonable care in drawing cheques so as not to facilitate forgery or material alteration, and the duty to promptly notify the bank upon learning of a forgery. The Macmillan formulation has been followed in England and other common law jurisdictions, including Canada and Australia, but the position in the United States has differed. Counsel for the bank suggested144 that under prevailing banking conditions it would be a short and logical step to extend the Macmillan doctrine by imposing upon a customer a duty to examine bank statements and vouchers with reasonable care and to report promptly any 1989 CanLIIDocs 26 discrepancy. Also, in the case of a large sophisticated customer, there is a suggested duty to have a proper system of internal auditing and control. There were two main issues in CP Hotels: first, whether, in the absence of a verification agreement, the customer was under a duty to examine bank statements and vouchers with reasonable care and to report any discrepancies, and whether a failure to do so constituted an estoppel; and, second, whether a customer owed a duty to the bank to establish a proper system of accounting and internal controls so as to minimize the commission of fraud and forgery. Two cases dealing with these issues have been considered by different tribunals which came to similar conclusions: the Supreme Court of Canada in CP Hotels 45 and the Privy Council in Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd146 The relevant facts in the CP Hotels case are simply put: a dishonest accountant in one of the operating units of this large corporation forged the signatures on cheques purportedly drawn by CP Hotels on the Bank of Montreal, payable to companies set up by the accountant. As the accountant was also preparing the bank reconcili- ation statements and was not subject to any internal control, the fraud

143 [1918] A.C. 777, [1918-19] All E.R. 30 (H.L.). 144 Supra, note 142 at 734. 145 Ibid. 146 (1985), [1986] 1 A.C. 80, [1985] 2 All E.R. 947 (P.C.), rev'g [1984] 1 Lloyd's Rep. 555 (H.K.C.A.). For comment, see E.P. Ellinger, Bank's Liability for Paying Fraudulently Issued Cheques (1985) 5 OxFoRD J. LEGAL STUDms 293 and M.H. Ogilvie, Bank Accounts and Obligations (1986) 11 CAN. Bus. L.J. 220. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 went undetected for some time. There was no verification agreement between CP Hotels and the Bank of Montreal. At trial, Montgomery J. asked the rhetorical question: "What is the duty a sophisticated customer owes to its banker? Is it the simple duty of care in drawing the negotiable instrument stated in 1916? Should it be a higher duty based on estoppel?"147 He then stated that the sophisticated commercial customer owed a duty to its bank to operate an efficient internal control system so that both bank and customer would be engaged in the prevention and minimization of losses through forgeries. In support of this conclusion, he quoted, inter alia, from the references to "commercial custom" in Bank of Montreal v. A.G. Quebec148 and the obiter dicta of Laskin J. (as he then was) in Arrow Transfer,149 suggesting a broad concept of a customer's duties. The Court further held that CP Hotels owed a duty to its banker to examine its bank statements with all reasonable care and to report discrepancies within a reasonable time. CP Hotels failed in this duty and its action against the Bank was dismissed. An appeal to the

Ontario Court of Appeal was dismissed by the majority for the reasons 1989 CanLIIDocs 26 given by the trial Judge. Lacourci~re J.A. dissented in the dismissal of the appeal. In his view, in the absence of a verification agreement, a duty to examine a bank statement and to report discrepancies does not exist in Canadian law. If such a duty were to be imposed, it should be accomplished by a Parliamentary amendment to section 49 of the Bills of Exchange Act, possibly along the lines of the American Uniform Commercial Code.1 50 He suggested, in the alternative, that perhaps the Supreme Court of Canada should depart from the traditional interpretation of the section. On further appeal, the judgment of the Supreme Court was delivered by Le Dain J. It contains both a scholarly survey of authorities in various common law jurisdictions and carefully drawn conclusions. Le Dain J. first examined the position in the United States. There, the case law imposes a duty on a customer to examine a bank statement and to report any discrepancies. Failure to do so would prevent the customer from demanding the rectification of errors, unless the bank itself was negligent. 151 This principle was later incorporated into section 4-406 of the Uniform Commercial Code (United States).

147 Supra, note 142, 32 O.R. (2d) at 561. This is presumably a reference to Columbia Graphophone Co. v. Union Bank of Canada (1916), 34 D.L.R. 743, 38 O.L.R. 326 (H.C.). 148 (1978), [1979] 1 S.C.R. 565, 96 D.L.R. (3d) 586. 149 Supra, note 40. 15o U.C.C. §4-406 (1978). 151The leading U.S. cases are Leather Manufacturers' Bank v. Morgan, 117 U.S. 96 (1886); Glassell Dev. Co. v. Citizens' Nat'l Bank of Los Angeles, 216 P. 1012 (Cal. Sup. Ct 1923). 1989] Bills of Exchange

With respect to English case law, Le Dain J. followed the Macmillan doctrine through numerous authorities starting with Young v. Grote.15 2 In Australia, the Macmillan doctrine was affirmed by the High Court in Commonwealth Trading Bank of Australia v. Sydney Wide Stores Pty Ltd53 The recent judgment of the Hong Kong Court of Appeal in Tai Hing and the appeal of that case to the Privy Council154 were thoroughly examined in the Supreme Court judgment. The case involved forgeries by a corporate employee similar to those in Arrow Transfer and CP Hotels. The issue, as in CP Hotels, was whether the customer's duty was merely not to draw cheques in such a way as to facilitate forgery and to notify the bank upon becoming aware of it, that is, the MacMillan doctrine, or whether the customer owed a wider duty to the bank, namely, to take reasonable precautions in the management of his or her business to prevent fraud and forgery, to examine bank statements and notify the bank of any discrepancies.

The Judicial Committee of the Privy Council held that no duty 1989 CanLIIDocs 26 wider than that recognized in Macmillan could be implied in a banking contract. Lord Scarman, giving the opinion of the Committee, dispar- aged the concept of concurrent liability in contract and tort. After having surveyed the relevant authorities, Le Dain J. gave his own conclusions. The Macmillan doctrine, followed in all common law jurisidictions surveyed (except in the United States), established a narrow scope of the duty of care owed by a customer to his or her bank, that is, to use reasonable care in drawing cheques so as not to facilitate forgery or material alteration. If this duty were to be widened, it would have to be by implication. He agreed with Cons J.A. in Tai Hing155 that, assuming a wider scope of customer duties was to be implied, it would have to apply to all customers, whether sophisticated

152 (1827), 4 Bing 253, 130 E.R. 764. Le Dain J. also referred to: Bank of Ireland v. Evans's Charities (1855), 5 H.L.C. 388, (sub nom. Bank of Ireland v. Trustees of Evans' Charities) 10 E.R. 950; Swan v. North British Australasian Co. (1863), 2 H. & C. 175, 159 E.R. 73; Arnold v. Cheque Bank (1876), 1 C.P.D. 578; Kepitigalla Rubber Estates Ltd v. Nat'l Bank of India Ltd, [1909] 2 K.B. 1010; Ogilvie v. West Australian Mortgage and Agency Corp., [1896] A.C. 257 (P.C.); Greenwood v. Martins Bank Ltd (1932), [1933] A.C. 51, [1932] All E.R. Rep. 318; M'Kenzie v. British Linen Co. (1881), 6 App. Cas. 82 (H.L.); William Ewing & Co. v. Dominion Bank (1904), 35 S.C.R. 133, leave to appeal to Privy Council refused (1904), A.C. 806 (P.C.). The essential factors of estoppel, put forward by Lord Tomlin in Greenwood v. Martins Bank Ltd (1932), [1933] A.C. 51 at 57 (H.L.), were quoted by Le Dain J. in CP Hotels, supra, note 142 at 752. 153 (1981), 55 A.L.J.R. 574 (H.C.). See also J.W. Carter, A Customer's Duty Towards His Banker (1982) 98 L.Q. REv. 19. 154 Supra, note 146. 155 Ibid. Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1 or otherwise. Limiting the duty to a "sophisticated commercial customer" would lead to uncertainty. Le Dain J. then thoroughly reviewed the doctrine of implied terms, drawing on numerous authorities156 and reaffirmed the narrow scope of duty as formulated in Macmillan. In a short judgment La Forest J., while generally agreeing with Le Dain J., expressed the opinion that the case should be decided within the general system or code governing bills of exchange. When the law was codified, the choice was made in favour of a narrow duty and it would be inconsistent with the basic policy choice to expand this duty. The judgment of the Supreme Court thus reaffirmed the long established Macmillan doctrine and did not favour further expansion of the duty of care.

3. Verification Agreements Protection given to a bank by a verification agreement in respect

of wrong entries in a customer's account is well illustrated in the 1989 CanLIIDocs 26 following cases. A typical verification agreement provides that if no objections are raised by a customer within 30 days of the receipt of a bank statement, the statement shall be deemed as conclusive evidence that all the entries therein are correct, that the customer agrees with the balance shown and that he releases the bank from all claims in respect of the statement. The verification agreement in Le Cercle Universitaire d' Ottawa v. National Bank of Canada157 provided that after the expiration of thirty days from the receipt of the statement it would be conclusively settled that the balance shown in the statement was correct. An employee of the Cercle deposited into her own account cheques payable to the Cercle and endorsed restrictively for deposit to the Cercle's account only. The Cercle sued the Bank for negligence. Steele J., applying Arrow Transfer Co. Ltd v. Royal Bank of Canada,5 8 held that the language of agreement was clear and protected the bank, even though there was a failure of the duty owed by the bank to the customer when the bank allowed the employee to deposit Cercle's cheques into her own account. A verification agreement protected a bank who debited cheques with a forged drawer's signature to a customer's account in Bank of

156 Lister v. Romford Ice & Cold Storage Co. (1956), [1957] A.C. 555, [1957] 1 All E.R. 125 (H.L.); Liverpool City Council v. Irwin (1976), [1977] A.C. 239, [1976] 2 All E.R. 39 (H.L.); The Moorcock (1889), 14 P.D. 64, [1886-90] All E.R. Rep. 530 (C.A.); Miller v. Hancock, [1893] 2 Q.B. 177 (C.A.); Selangor United Rubber Estates Ltd v. Cradock (No. 3), [1968] 1 W.L.R. 1555, [1968] 2 All E.R. 1073 (Ch. D.); Karak Rubber Co. v. Burden (No. 2) (1971), [1972] 1 W.L.R. 602, [1971] 3 All E.R. 1118 (Ch. D.). 1- (1987), 61 O.R. (2d) 456, 43 D.L.R. (4th) 147 (H.C.). 158 Supra, note 40. 1989] Bills of Exchange

Nova Scotia v. Steeves. 159 Steeves had an account with the bank. On several cheques, Steeves' signature was forged by his wife. Steeves notified the bank manager and the account was frozen. After some time, Steeves started operating the account again. He received a bank statement with a balance, which included the amounts of the forged cheques. Steeves did not object within the prescribed period and therefore the bank was protected by the verification agreement, even though it knew that the balances included forged cheques. In Shields (Village) v. Toronto Dominion Bank160 a verification agreement was held to be a complete defence in either an action for breach of contract or in negligence, against a defendant bank who debited to a township's account cheques forged and materially altered by a township's employee.

D. Certification The nature and effects of the certification of a cheque were 61 examined in several cases. In Bank of Nova Scotia v. Lockhart it 1989 CanLIIDocs 26 was held that where a creditor obtains the certification of a debtor's cheque it amounts to payment, even though the cheque may not be cashed. Lockhart believed that he owed a certain sum to the Bank of Nova Scotia. That sum, however, did not include interest owed. Lockhart sent to the Bank of Nova Scotia a cheque for a smaller amount with an accompanying letter, stating that the cheque was in full satisfaction of the loan. Bank of Nova Scotia, the creditor, had the cheque certified by the drawee bank, the Royal Bank, but did not cash it. It was held, following Marr's Marine Ltd v. Rosetown Chrysler Plymouth Ltd,162 that if the creditor has a cheque certified but does not cash it, the effect is the same as payment. It was also held that the whole transaction satisfied the requirements of subsection 13(1) of the Judicature Act, 163 which provides that part performance rendered in pursuance of an agreement will extinguish an obligation. The issue of whether there can be a verbal certification of a cheque was left in doubt in Steinbach Credit Union Ltd v. Seitz.164 The trial Judge was uncertain. He stated that while it would appear that certification must be in writing, there are circumstances where it would be necessary and expedient to certify a cheque verbally. The

159(1987), 84 N.B.R. (2d) 217, 214 A.P.R. 217 (Q.B.). 160 [1988] 3 W.W.R. 268, 64 Sask. R. 253 (Q.B.), leave to appeal granted (1988), 67 Sask. R. 79 (C.A.). 161 (1987), 75 A.R. 156, 49 Alta L.R. (2d) 378 (Q.B.). 162 (1975), 61 D.L.R. (3d) 497, [1975] W.W.D. 164 (Sask. Q.B.). 163 R.S.A. 1980, c. J-1. There is a similar provision in the Ontario Mercantile Law Amendment Act, R.S.O. 1980, c. 265, s. 16. '- [1987] 6 W.W.R. 142, 41 D.L.R. (4th) 545 (Man. Q.B.), affd on other grounds, [1988] 3 W.W.R. 334, 50 D.L.R. (4th) 436 (Man. C.A.). Ottawa Law Review/Revue de droit d'Ottawa [Vol. 21:1

Court of Appeal felt that the case should have been decided on the basis of estoppel. It held that where a drawer of a cheque requests the drawee credit union to give an unconditional guarantee that a cheque will be honoured, the drawee institution is bound by the guarantee and the holder is stopped from countermanding the cheque. The nature of certification was thoroughly canvassed in Re Mau- bach and Bank of Nova Scotia.165 Gray J., having examined the authorities and literature came to the conclusion that:

[A]Ithough certification by the drawee bank is not "acceptance" of the cheque by the drawee bank within the meaning of s. 35 of the Bills of Exchange Act, certification is equivalent to an acceptance with the result that the drawee bank is liable on a certified cheque to the payee and any holder thereof. This follows from the authorities I have quoted. By certification, the respondent upon presentation undertakes to pay the cheque .... 166

The Court of Appeal agreed with the reasons of the trial Judge with

one variation: in their view the certification of a cheque by a bank is 1989 CanLIIDocs 26 usually equivalent to acceptance and on the facts of this case the certification of the cheque constituted acceptance, as the cheque was stamped "accepted" and signed by a bank employee.

165 (1987), 60 O.R. (2d) 189, 40 D.L.R. (4th) 134 (H.C.), affd (1987), 62 O.R. (2d) 220, 44 D.L.R. (4th) 575 (C.A.) [hereinafter cited to 60 O.R. (2d)]. For comment on this case, see B. Geva, Lost Cheques, Certification and Countermand - Is the Law Satisfactory? (1988) 2 B.EL. Rsv. 357. 166 Ibid. at 197.