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Torts - Conversion

Teva Canada Limited v. Bank of Montreal (Ont CA, 2016)

In this case the Court of Appeal made the following useful observations on the tort of conversion, here in the context of fraudulent cheques and the Bills of Exchange Act:
(2) The tort of conversion

[24] Conversion is the wilful interference with the goods of another – that is taking, using or destroying these goods in a manner inconsistent with the owner’s right of possession. In Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727, which remains the principal authority on the BEA issues in this appeal, Iacobucci J., in his majority reasons, described at para. 83 the tort of conversion in the banking context:
A bank converts an instrument, including a cheque, by dealing with it under the direction of one not authorized, by collecting it and making the proceeds available to someone other than the person rightfully entitled to possession. It should be noted that the tort of conversion is one of strict liability.
[25] Boma also confirmed that the drawer of a cheque (Teva) has an action in conversion against a collecting bank (Scotiabank or TD). A collecting bank is liable in conversion if it credits the account of someone not authorized to deal with the cheque. As McConachie and his accomplices were not lawfully in possession of the 63 cheques and deposited them into accounts they controlled, the two banks are prima facie liable to Teva for converting its cheques.

[26] As Iacobucci J. also noted in the above passage, conversion is a strict liability tort. That the banks committed these wrongful acts, as they did, innocently and in good faith, affords them no defence. Equally, a drawer’s negligence cannot provide a bank with a defence to a conversion action, and a court cannot therefore apportion liability on the basis of a drawer’s contributory negligence.

[27] In his majority reasons in Boma at para. 80, Iacobucci J. discussed the benefits of the current bills of exchange system and the seeming unfairness and arbitrariness of excluding any notion of fault from the determination of liability under that system:
To some, the allocation of risk in the bills of exchange system may seem arbitrary, but in my view a necessary and coherent rationale sustains this allocation. With respect to forged endorsements, for example, no party in particular is in any better position to detect the fraud than any other. It is a risk that all parties must bear, including collecting banks. It is a price that must be paid if one wishes to enjoy the significant benefits of the bills of exchange scheme, not the least of which is, from the bank's perspective, the facilitation of huge numbers of financial dealings conducted rapidly, and without overwhelming transaction costs. While the banks are accorded the important advantage of holder in due course status in many situations, it would not be appropriate, as the respondent would have it, to exempt any party, including collecting banks, from all exposure to the risk and consequence of fraud.
[28] That any alleged negligence by Teva gives the banks no relief, is evident from previous proceedings between these parties. The banks had tried to avoid liability in conversion by asserting Teva’s negligence. Scotiabank sought to amend its statement of defence to plead “estoppel by negligence”. Both banks asserted a counterclaim for damages for negligence. This court rejected both pleas, in Teva Canada Limited v. Bank of Montreal et al., 2012 ONCA 486 (CanLII), at paras. 19 and 20:
In Boma, the court recognized that there is a tension between the law’s need for certainty and equity’s need to achieve objectively fair results. In the case of bills of exchange, courts of law and equity over several hundred years have determined that certainty is the predominant value and that the operation of an efficient banking market requires strict adherence to objective rules for the allocation of risk.

We are of the view that if one applies the line of reasoning set out by the court in Boma to the circumstances in this case, it is not tenable that a court would recognize the new duty of care urged by Scotia Bank, nor would it recognize the availability of a defence of estoppel by negligence which Bank of Nova Scotia seeks to plead. Doing so would change the allocation of risk and affect the certainty with which participants in the banking system now conduct banking transactions.
[29] Still, though the tort of conversion is a strict liability tort, it is not an absolute liability tort. Section 20(5) of the BEA gives a collecting bank a statutory defence to an action for conversion.


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