Between: Teva Canada
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Court File No. 36918 IN THE SUPREME COURT OF CANADA (ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO) B E T W E E N: TEVA CANADA LIMITED APPELLANT (Appellant) - and - TD CANADA TRUST and BANK OF NOVA SCOTIA RESPONDENTS (Respondents) APPELLANT’S FACTUM (TEVA CANADA LIMITED, APPELLANT) (Pursuant to Rule 42 of the Rules of the Supreme Court of Canada) 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 Toronto, 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 PAGE PART I –STATEMENT OF FACTS ...............................................................................................1 I. OVERVIEW ........................................................................................................................1 II. STATEMENT OF FACTS ..................................................................................................3 III. PROCEDURAL HISTORY.................................................................................................4 a) The Banks Attempt to Plead Negligence .................................................................4 b) The Decision of the Motion Judge (Whitaker J.) .....................................................4 c) The Decision of the Ontario Court of Appeal (Laskin, Weiler and Cronk, JJ.A.) ........................................................................................................................6 PART II – THE QUESTION IN ISSUE..........................................................................................8 PART III – STATEMENT OF ARGUMENT .................................................................................8 (A) THE COURT BELOW MISDIRECTED ITSELF IN PRINCIPLE........................9 (i) The strict liability tort of conversion, and the policy behind it ...................9 (ii) The section 20(5) defence, and the policy behind it ..................................11 (B) THE COURT BELOW INTRODUCED A DEFENCE OF DRAWER’S NEGLIGENCE INTO A STRICT LIABILITY TORT ........................................12 (i) The Decision ..............................................................................................12 (ii) The Context and Effect of the Decision......................................................13 (C) THE COURT BELOW ERRED IN ITS INTERPRETATION OF SECTION 20(5) ....................................................................................................17 (i) The Established Interpretation of Section 20(5) ........................................17 (a) Fictitious Payees ............................................................................17 The pre-codification rationale .......................................................17 The BEA and the Requirement of Fraudulent Intent .....................19 The Proper Interpretation of Section 20(5): Concrete Column, Boma, and Fok Cheong ...................................................21 Fictitious Payees in the Decision Below ........................................23 The Motion Judge’s Findings of Fact ............................................25 (b) Non-Existing Payees ......................................................................26 The evolution of “non-existing” ....................................................27 Non-Existing Payees in the Decision Below ..................................29 Stare Decisis ..................................................................................32 ii CONCLUSION: THE DECISION BELOW UNDERMINES COMMERCIAL CERTAINTY, UPON WHICH THE BILLS OF EXCHANGE SYSTEM RELIES .....................33 PART IV – SUBMISSIONS IN SUPPORT OF ORDER SOUGHT FOR COSTS ......................35 PART V – ORDER SOUGHT .......................................................................................................35 PART VI – TABLE OF AUTHORITIES ......................................................................................36 PART VII – STATUTORY PROVISIONS ..................................................................................38 PART I –STATEMENT OF FACTS I. OVERVIEW 1. When an employee defrauds its employer by inducing it to issue fraudulent cheques, an innocent party must typically bear the ensuing loss: the employer, or the banks that dealt with the cheques. 2. Under Canadian law, when a bank pays the value of a cheque to a person who is not entitled to possession of the cheque, the bank is strictly liable to the drawer of the cheque for the tort of conversion. The bank cannot absolve itself of liability by proving that the defrauded employer was somehow negligent. 3. Parliament has enacted a narrow defence to the tort of conversion in section 20(5) of the Bills of Exchange Act,1 ("section 20(5)"), which provides that “[w]here the payee is a fictitious or non- existing person, the bill may be treated as payable to bearer”. This "fictitious payee defense" has existed under Canadian law for well over a century. 4. This Court has addressed the defence in Concrete Column2 and then, more recently, in Boma.3 In both cases, majorities of this Court found that unless Parliament intervenes, the BEA requires that the banks bear the risk of such fraudulent employee schemes.4 Parliament has not intervened. 5. This case involves a typical employee cheque fraud scheme. Neil McConachie, an employee in the appellant Teva Canada Limited (“Teva”)’s finance department, fraudulently induced Teva to issue cheques payable to entities with names similar or identical to those of Teva’s actual customers or suppliers. McConachie misappropriated these cheques, and deposited them into accounts he had opened with the respondent banks (“TD” and “Scotiabank” or the “Banks”) The Banks accepted Teva’s unendorsed cheques for deposit and credited McConachie with the funds. 1 Bills of Exchange Act, RSC 1985, c B-4 (“BEA”). 2 Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., [1977] 2 SCR 456 (“Concrete Column”) [Appellant’s Book of Authorities (“ABA”) Tab 31]. 3 Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, [1996] 3 SCR 727 (“Boma”) [ABA Tab 6]. 4 Concrete Column, p. 484 [ABA Tab 31]; Boma, para. 34-35 [ABA Tab 6]. 2 6. After the fraud was discovered, Teva sued the Banks for converting the cheques. On summary judgment, the Motion Judge ruled in favour of Teva, finding that the Banks were liable for converting the cheques and that the fictitious payee defence did not apply. Applying this Court’s interpretation of section 20(5) in Boma, the Motion Judge found that the payees were not fictitious or non-existent, as “[Teva] believed at the time that each cheque was generated to satisfy a legitimate obligation to a customer”5, as it “did not at any time intend or authorize McConachie or his associates to possess or use the cheques for their own personal use”6 and as “[t]he actual account holders were not intended by [Teva] to be the payees of the cheques.”7 7. The Ontario Court of Appeal (or the “Court below”) overturned the decision of the Motion Judge, and found that the payees were both “fictitious” and “non-existent” and that, as a result, Teva (and not the Banks) must absorb the loss caused by McConachie’s fraud. Essentially, the Court of Appeal found that it could not be that Teva had intended to pay real entities for legitimate obligations, as no directing mind or responsible officer at Teva had reviewed the fraudulent cheques, and as Teva’s internal cheque approval policies had not been followed.8 8. The Appellant submits that the Court below has misstated the policy and altered the law concerning section 20(5). The Court below articulated the purpose of section 20(5) in terms consistent with the policy preferences of the dissents, not the majorities, in Concrete Column and Boma. It effectively introduced a complete defence of drawer's negligence into this strict-liability area of law, contrary to Boma. It interpreted Boma and Concrete Column so as to expand the scope of the section 20(5) defence and restrict the protections available to drawers such as Teva. Employers