Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711 (1987)

Canadian Pacific Hotels Ltd. v. Bank of Montreal, [1987] 1 S.C.R. 711

Canadian Pacific Hotels Limited Appellant v.

Bank of Montreal Respondent and

Morris Sands also known as Morris Sigulim also known as Morris Van Sigoulim, Dundas Discounts Limited and Sig-Mor Sales Limited Defendants indexed as: canadian pacific hotels ltd. v. bank of montreal

File No.: 17330.

1985: April 24; 1987: June 4.

Present: Estey, McIntyre, Chouinard*, Lamer, Wilson, Le Dain and La Forest JJ.

*Chouinard J. took no part in the judgment.

on appeal from the court of appeal for ontario

Banks and banking operations -- Forged cheques -- Customer's employee forging signatures of signing officers and concealing forgeries -- Whether customer precluded from setting up forgeries against the bank -- Whether or not duty, in the absence of a verification agreement, to examine bank statements with reasonable care and to report discrepancies within a reasonable time -- Whether or not duty to maintain adequate internal accounting controls for the prevention and minimization of loss through forgery -- Bills of Exchange Act, R.S.C. 1970, c. B-5, s. 49(1).

Bills of Exchange -- Forged cheques -- Customer's employee forging signatures of signing officers and concealing forgeries -- Whether or not customer precluded from setting up forgeries against bank -- Whether or not duty, in the absence of a verification agreement, to examine bank statements with reasonable care and to report discrepancies within a reasonable time -- Whether or not duty to maintain adequate internal accounting controls for the prevention and minimization of loss through forgery.

A number of forged cheques were drawn on the chequing account, at respondent bank, of one of appellant's operating units and were made payable to defendant companies which were controlled by defendant Sands. The cheques in question required the signature of both the unit's manager and its accountant. Sands, as assistant accountant for the unit forged both signatures and then, when he became the unit's accountant, that of the manager. The procedure manual required the accountant of the unit to prepare monthly bank reconciliations with a list of outstanding cheques and to forward them to the assistant accountant of the head office of the appellant. The responsibility for the bank reconciliations based on the daily bank statements and disbursement records was delegated to Sands, as assistant accountant, by the unit's accountant and was later exercised by Sands as accountant. The unit's accountant received a summary statement of the monthly bank reconciliation from Sands, generally without a list of the outstanding cheques, but otherwise did not check his work in the preparation of the bank reconciliation, or examine the daily bank statements or the cancelled cheques.

Appellant's banking operations were part of the over-all banking arrangements made with the bank by Canadian Pacific Limited ("CP") for itself and its subsidiary and associated companies. CP was not required by the bank to sign a verification agreement obliging it and its subsidiary and associated companies to verify bank statements and report discrepancies within a specified period of time. Neither the general agreement between CP and the bank respecting the bank's remuneration nor the "Operation of Account Agreement" contained any reference to the verification of bank statements. The daily bank statement sent to the operating unit of the appellant contained the following statement: "Please check this statement promptly. Any errors, irregularities, or omission found therein should be reported within 30 days of delivery or mailing, otherwise it will be considered correct."

The trial judge, who was upheld by a majority of the Court of Appeal, found two duties on the part of the appellant: the duty, in the absence of a verification agreement, to examine bank statements with reasonable care and to report any discrepancies within a reasonable time, and the duty to maintain an acceptable system of internal controls for the prevention and minimization of loss through forgery. He found that the appellant was in breach of both duties, that its negligence was the cause of the loss, and that it was precluded by such negligence from setting up the forgeries against the bank. He accordingly dismissed the appellant's action for recovery of the amount by which its account had been debited for the payment of the forged cheques.

The issue was whether the appellant was precluded, within the meaning of s. 49(1) of the Bills of Exchange Act, from setting up the forgeries against the respondent. That question turned on whether, apart from the question of policy, there was a sound basis in law for either of the duties of care affirmed by the trial judge.

Held: The appeal should be allowed.

Per Estey, McIntyre, Lamer, Wilson and Le Dain JJ.: The appellant was not in breach of any duty owing to the respondent and was therefore not precluded from setting up the forg...

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