RECENT DEVELOPMENTSIN CANADIAN LAW:

BILLS OF EXCHANGE

Emil J. Hayek*

I. INTRODUCTION .................................. 591

]I. GENERAL .......................................... 592A. Crown Not Bound by the Bills of Exchange Act ........ 592

Ii. FORM AND INTERPRETATION ......................... 593A. Unconditional Order .............................. 593B. Acceleration Clauses .............................. 595C. Sum Certain of Money ............................ 596D. Signing in Representative Capacity .................. 598

IV. INCOMPLETE INSTRUMENT ........................... 600

V. HOLDERS .......................................... 601A. Rights of a Holder ................................ 601B. Holder in Due Course ............................. 602C. Payee as a Holder in Due Course ................... 604

VI. LIABILITIES OF PARTIES .............................. 605A. Drawee ......................................... 605B. Accommodation Party ............................. 606C. Note and Mortgage ............................... 610

VII. DEFENCES ......................................... 611A. Forgery ......................................... 611

1. Forged Endorsement ........................... 6122. Forged Drawer's Signature ...................... 614

B. Discharge of Obligations ........................... 614C. Material Alteration ............................... 615

* Faculty of Law, Common Law Section, University of Ottawa

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VIII. CHEQUES .......................................... 616A. Depositary Bank as a Holder in Due Course .......... 616B. Countermand of Payment .......................... 619C. Payment over Countermand ........................ 620D. Banker-Customer Relationship ...................... 622

1. Joint Accounts ................................ 6222. Duty to Honour Customers' Cheques .............. 6233. Clearing a Cheque ............................. 6244. Breach of Trust, Negligent Breach of Contract,

Negligence and Conversion ...................... 625

IX. PROMISSORY NOTES ................................. 628

Bills of Exchange

I. INTRODUCTION

Although some attention was paid to the law relating to Bills ofExchange in a previous survey,1 this survey is the first to deal exclusivelywith the subject. The period from 1980 to March 1985 forms the focalpoint of the survey; however, certain earlier important developmentsare also included. This survey is not intended to be a digest of casesreported during this time-period; rather, it concentrates on those areaswhere there have been relevant developments and selects those caseswhich best illustrate the principles involved. Clearly, any such selectionis a matter of personal perception and preference.

The survey deals with negotiable instruments: bills of exchange,cheques and promissory notes. Generally, the same legal principles,subject to necessary modifications,2 apply to all three types of instruments.Therefore, it is not necessary to draw a distinction between theseinstruments unless the particular legal rule under discussion applies onlyto a particular type of instrument, for example, stop payment of a cheque.The general law of banking is outside the scope of this survey, however,banking issues arising in connection with negotiable instruments areconsidered.

Developments in the law of negotiable instruments have generallyoccurred through the caselaw. One notable exception was an amendmentto the Bills of Erchange Act,3 provided for in the Banks and BankingLaw Revision Act.4 This amendment created section 164.1, which cameinto force on December 1, 1980 and which was inserted into the Billsof Exchange Act. The section expands the meaning of "bank" for thepurposes of Part III of the Bills of Exchange Act to encompass everymember of the Canadian Payments Association, including every creditunion which is a member of the Association. The result is that as ofDecember 1, 1980, bills of exchange payable on demand, drawn ontrust companies, credit unions, caisses populaires and similar institutionsare treated as cheques. Previously, such instruments were regarded asbills of exchange and not cheques. A cheque was defined as a bill ofexchange drawn on a bank.5 A bank for this purpose meant "anincorporated bank or savings bank carrying on business in Canada",6

thereby excluding the so-called near-banks. 7 Notwithstanding the amend-

' Fridman, Annual Survey of Canadian Law: Commercial Law, 13 OTTAWA L.REV. 571, at 613 (1981).

2 See Bills of Exchange Act, R.S.C. 1970, c. B-5, subs. 165(2), 186(1). All subsequentreferences to sections are to sections of this Act unless otherwise indicated.

3 R.S.C. 1970, c. B-5.4 S.C. 1980-81-82-83, c. 40, Part V, s. 92.5 Bills of Exchange Act, R.S.C. 1970, c. B-5, s. 165.6 S. 2.7 Interestingly, it has been submitted that instruments drawn on the near-banks

are cheques at common law. See FALCONBRIDGE ON BANKING AND BILLS OF EXCHANGE856 (7th ed. A. Rogers 1969).

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ment, the distinction may still be relevant with respect to "cheques"drawn on private banks, which are not members of the CanadianPayments Association.

Throughout the survey, an attempt has been made to discuss eachcase under the most appropriate heading. Nonetheless, the authorrecognizes that the examination of certain cases might well have beenincluded under more than one heading.

II. GENERAL

A. Crown Not Bound by the Bills of Exchange Act.

The question of whether the Crown is bound by the Bills of ExchangeAct was considered by the Federal Court in Canada Trust Co. v. TheQueen.8 At issue was the applicability of subsection 21(5). Applyingthe decision of the Supreme Court of Canada in R v. Canadian TransportCommission,9 the Court held that section 16 of the Interpretation Act l0

exempted the Crown from the provisions of the Bills of Exchange Act,there being no express provision in the legislation to the contrary."I

The action was brought by the Canada Trust Company for thevalue of a number of cheques which it had cashed and for which ithad reimbursed the government upon being requested to do so. Thefacts are simple. The cheques were Old Age Pension cheques on whichthe widower forged his deceased wife's signature and which he thencashed at Canada Trust. Both the drawer (the Deputy Receiver General)and Canada Trust were unaware of her death. The plaintiff contendedthat it was a holder in due course of cheques payable to bearer undersubsection 21(5) which provides that where the payee is a fictitiousor non-existing person, the bill may be treated as payable to bearer.

In his judgment, Cattanach J. reviewed the authorities interpretingthis section and, having concluded that it did not bind the Crown,dismissed the action. He then made two interesting observations. Firstly,he mentioned the principle of two competing innocent parties, referredto by Montgomery J. in Canadian Pacific Hotels Ltd v. Bank ofMontreal.12

The principle provides that if two parties suffer from the fraud of athird, the one who most enabled that third party to commit the fraudshould bear the loss. Secondly, however, he observed that as there was

8 [1982] 2 F.C. 722 (Trial D.).9 [1978] 1 S.C.R. 61, 75 D.L.R. (3d) 257 (1977).10 R.S.C. 1970, c. 1-23.1 Supra note 8, at 739.12 32 O.R. (2d) 560, at 574, 122 D.L.R. (3d) 519, at 533 (H.C. 1981), aff'd

139 D.L.R. (3d) 575 (Ont. C.A. 1982), leave to appeal granted [1982] 2 S.C.R. vi,139 D.L.R. (3d) 575, at 576.

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no contract between the parties in the present case and subsection 21(5)was therefore inapplicable, the principle was not relevant. Cattanach J.did note, however, that had the principle applied, the plaintiff shouldhave borne the loss.13 These sentiments are similar to those voiced byLaskin C.J.C. and Spence J. in their dissenting opinions in the RoyalBank of Canada v. Concrete Column Clamps (1961) Ltd 14

III. FORM AND INTERPRETATION

The principal requirement of a bill of exchange is certainty. Thisrequirement has long been recognized:

It would perplex the commercial transactions of mankind, if paper securitiesof this kind were issued out into the world encumbered with conditionsand contingencies, and if the persons to whom they were offered innegotiations were obliged to enquire when these uncertain events wouldproblably be reduced to a certainty.15

Thus, under the Bills of Exchange Act, a bill must be an unconditionalorder,16 the drawee must be named or otherwise indicated with reasonablecertainty' 7 unless a bill is a bearer bill, the payee must be similarlynamed or indicated, 18 a bill must be payable on demand or at a fixedor determinable future time' 9 and it must be for a sum certain in money.20

An instrument that does not comply with these requirements is not abill of exchange.2 1 Several recent judgments have clarified these re-quirements of certainty.

A. Unconditional Order

In Eastern Elevator Services Ltd v. Wolfe22 a prospective employeegave his employer a cheque for $5,000 as an indication of his intentionto enter into an employment arrangement. The defendant failed to enterinto full-time employment and issued a stop payment order on the cheque.When the cheque was presented for payment by the plaintiff, it wasdishonoured. In an action on the cheque the defendant argued, inter

13 Supra note 8, at 742.14 [1977] 2 S.C.R. 456, 74 D.L.R. (3d) 26 (1976). This case also concerned a

fictitious payee.15 Carlos v. Fancourt, 101 E.R. 272, at 273 (K.B. 1794).16 R.S.C. 1970, c. B-5, ss. 17, 18.17 S. 20.18 Sub. 21 (4).19 Ss. 17, 23, 24.20 Sub. 17(1).21 Sub. 17(2).22 46 N.S.R. (2d) 698, 119 D.L.R. (3d) 643 (S.C. 1981).

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alia, that the instrument was payable on a contingency, the fulfilmentof the employment arrangement and, therefore, was not a bill of exchange.The trial judge quoted subsection 18(1) of the Bills of Exchange Act,"[a]n instrument expressed to be payable on a contingency is not abill" and held that it was clearly known to both parties that the chequewas subject to conditions. He then stated, "[tiherefore, as between thesetwo parties there was an 'expressed' intention that the cheque was payableon a contingency.... [T]he cheque in question was not a bill and istherefore not protected by the Bills of Exchange Act".2 3 The judge furtherheld that had the plaintiff endorsed the cheque to a bona fide thirdparty, who would take it as a holder in due course, the endorsee couldhave enforced the cheque: "the word 'expressed' as used in s. 18(1)would have to be construed as meaning 'expressed' to the holder indue course. This could be 'expressed' by endorsing the condition onthe cheque itself."24 No authorities were cited to support this finding.

With respect, it is submitted that the word "expressed" as usedin subsection 18(1) means "expressed on the face of the bill". This seemsto be clearly stated in leading textbooks and the authorities cited therein.25

In the opinion of the author, the instrument was an unconditional orderas no condition or contingency was expressed on its face although itwas issued subject to a condition as provided for in subsection 40(1).The Court failed to distinguish between an "unconditional order" 26 anda "delivery subject to condition". 27

In the case of Michael Doyle & Assocs. v. Bank of Montreal2 8 adraft issued in conjunction with a letter of credit read:

Pay to the order of MICHAEL DOYLE & ASSOCIATES LTD. the sumof 111,331.63 (Dutch Florin) Drawn under Nederlandsche Midden-standsbank N.V. Amsterdam Credit No. 15.0720B085 dated 15 March, 1979Bank of Montreal advice No. EXPLC 840/6285. Value received.29

The draft was accepted by means of a stamp containing the date, placeof payment and the word "accepted", followed by the signature of asigning officer and the holder was notified of the acceptance. In anaction on the draft, it was held that the reference to the Dutch bankcredit number and the inclusion of the word "advice" did not renderthe draft conditional. The reference was to show the reason the drafthad been drawn. Furthermore, there was nothing on the face of the

23 Id. at 708, 119 D.L.R. (3d) at 651.24 Id. at 709, 119 D.L.R. (3d) at 651.25 Supra note 7, at 464, 472-73; BYLES ON BILLS OF EXCHANGE 8-9 (24th ed.

M. Megrah & F. Ryder 1979).26 Bills of Exchange Act, R.S.C. 1970, c. B-5, ss. 17, 18.27 Sub. 40(1).28 19 B.L.R. 62 (B.C.S.C. 1983).29 Id. at 73.

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bill indicating that there had not been valid acceptance or that the billwas conditional.30

B. Acceleration Clauses

The term "acceleration clause" is used to describe clauses, frequentlyfound in contracts or bills providing for payment of an obligation byinstalments, to the effect that the total unpaid sum becomes immediatelypayable should there be a default on any instalment. The validity ofbills and notes incorporating such clauses was considered in the followingcases.

The case of Canada Permanent Trust Co. v. KowaP1 concernedpromissory notes which gave the holder an option to accelerate theamount owing in the event of default in payment of any of the instalments.The defendant contended that the notes were not valid promissory notesas, upon default, the acceleration could occur "at the option of the holder".The issue was whether such notes provided for payment of a "sumcertain" at a "fixed or determinable future time". Boland J. found thatthe notes were valid. He placed particular reliance on the judgmentsof the Saskatchewan Supreme Court in First National Bank of IowaCity v. Rooney32 and the Supreme Court of Canada in John BurrowsLtd v. Subsurface Surveys Ltd.33 The notes provided for a definite futurematurity date when a definite amount would become due. The factthat the note might have become payable at an earlier date on theoccurrence of a future event did not render the note payable on acontingency. Furthermore, this common law position was codified bysubsection 28(1) which established that acceleration on default does notrender the sum payable uncertain.

The New Brunswick Court of Queen's Bench applied Kowal inCoulombe v. Bank of Nova Scotia.34 The Court held that a promiseto pay the "total balance due" upon request at the occurrence of certainevents listed on the back of a chattel mortgage (including the blanketclause, "[a]nything else happens that [the Bank] believes endangers [theplaintiff's] ability to pay or that [the Bank] believes endangers the propertyin any way"35 was a valid promissory note.

Another interesting aspect of acceleration clauses was consideredin Bordo v. 403512 Ontario Inc.36 In this case the defendant raisedthe rather novel defence that an acceleration clause is in the nature

30 Id. at 75.31 32 O.R. (2d) 37, 120 D.L.R. (3d) 691 (H.C. 1981).32 4 W.W.R. 445, 11 D.L.R. 359 (Sask. S.C. 1913).33 [1968] S.C.R. 607, 68 D.L.R. (2d) 354.34 53 N.B.R. (2d) 414 (Q.B. 1984).35 Id. at 416.36 41 O.R. (2d) 68, 145 D.L.R. (3d) 235 (H.C.1983).

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of a penalty of forfeiture. Therefore, he argued that he was entitledto relief under section 22 of the Judicature Act,37 which reads:

The court has power to relieve against all penalties and forfeitures, and,in granting such relief, to impose such terms as to costs, expenses, damages,compensation and all other matters, as are considered just.

The plaintiffs response was that an acceleration clause cannot becharacterized as either a penalty or a forfeiture and, in the alternative,that the Bills of Exchange Act provides a complete and exhaustive code,precluding reliance on the Judicature Act. On the first issue, applyingDunlop Pneumatic Tyre Co. v. New Garage & Motor Co.,38 the Courtheld that the acceleration clause did not operate as a penalty. The Courtalso followed In Re Emerald Christmas Tree Co. and Boel & SonsEnterprises Ltd.39 in holding that it did not constitute a forfeiture.Concerning the alternative claim, the judge was of the opinion thatthe provisions of the federal Bills of Exchange Act are not in conflictwith the provincial Judicature Act and that the two can stand together.

C. Sum Certain of Money

The most important requirement of the Bills of Exchange Act, thatthe instrument must be for a sum certain of money, is contained insections 17 and 176. Several cases concerning instruments that providefor a payment of a principal sum with a floating rate of interest haverecently come before the courts. The decisions are difficult to reconcile,both with each other and with the prior authorities.

The Supreme Court of Canada reviewed the authorities on thesubject in MacLeod Savings & Credit Union Ltd v. Perrett.40 The Court,speaking through Mr. Justice Beetz, quoted a statement as to the meaningof a "sum certain" from Lamberton v. Aiken,41 to the effect that thesum must either be ascertained in gross on the face of the documentor it must be capable of being ascertained by numerical calculationfrom materials contained in the document. Beetz J. also observed thatthe scheme of the Act is to ensure the currency of negotiable instruments.While certainty on the face of the instrument is the rule, it is not anabsolute term. It is a matter of judgment in some cases whether anexplicit or implicit reference to extrinsic circumstances creates such adegree of uncertainty as to affect the currency of the instrument. 42 It

37 R.S.O. 1980, c. 223.38 [19151 A.C. 79, at 86-88 (Lord Dunedin).39 13 B.C.L.R. 122, 105 D.L.R. (3d) 75 (C.A. 1979).40 [1981] 1 S.C.R. 78, 118 D.L.R. (3d) 193.41 37 Sc. L.R. 138, at 139 (H.L. 1899) (Lord M'Laren).42 Supra note 40, at 86-87, 118 D.L.R. (3d) at 198-99.

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is this qualification of the rule requiring certainty on the face of theinstrument that has caused problems.

The MacLeod Savings case was followed in Bank of Montreal v.A & M Investments Ltd,43 A note providing for interest at 1.75 percentabove the Bank of Montreal Small Business Base interest rate in effectfrom time to time was held not to be for a "sum certain" becauseit was not possible to calculate the interest merely by consulting theface of the document. Similarly, in Bank of Montreal v. Dezcam IndustriesLtd.44 it was held that a promissory note which carried a rate of interestafter its due date, equivalent to that charged by the Bank from timeto time to its most creditworthy customers, failed because of uncertainty.Taggert J.A. did not have to decide whether extrinsic evidence toascertain the rate of interest could be properly called because, in thecircumstances of the case, the evidence as to interest rates charged bythe Bank to its creditworthy customers only led to further uncertainty. 45

On the other hand, a promissory note bearing interest at a rateequal to the Royal Bank prime rate from time to time plus two percentwas held to be valid in Royal Bank of Canada v. Reed.46 Here LenderL.J.C., following obiter dicta of Beetz J. in MacLeod Savings,47 held thatincorporation by reference of the Royal Bank's prime rate did not createsuch a degree of uncertainty as to unduly affect the currency of thenote. He noted that the Royal Bank is a large national financial institutionand it would not be difficult at any given time to ascertain its primelending rate. Haley Cty. Ct. J. followed a similar line of reasoning inNational Bank of Canada v. Pearl48 regarding a promissory note bearinginterest at two percent above the prime rate of the National Bank.

It seems that problems with floating interest charges will continueas long as there is debate as to whether the prime consideration is certaintyon the face of the instrument or the ease with which the rate can beascertained by reference to extrinsic evidence. For example, CanadianAcceptance Corp. v. Noye & Raynor Construction Ltd 49 concerned apromissory note for a fixed amount of money stated on the face ofthe note. This amount represented the sum of the cash price of a machineand carrying charges calculated at an unspecified interest rate. Notsurprisingly, the Court held the note to be for a "sum certain" as theinstrument was an unconditional promise to pay the specified sum.

43 136 D.L.R. (3d) 181 (Sask. Q.B. 1982).44 [1983] 5 W.W.R. 83, 147 D.L.R. (3d) 359 (B.C.C.A.)45 Id. at 87, 147 D.L.R. (3d) at 363.46 21 B.L.R. 64 (B.C.S.C. 1982).47 Supra note 40.48 33 C.P.C. 158 (Ont. Cty. Ct. 1983).49 33 Nfld. & P.E.I.R. 361 (P.E.I.S.C. 1980).

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D. Signing in Representative Capacity

The Bills of Exchange Act has been with us since 1893. Corporationshave played a dominant role in our business life throughout this centuryand more notably since World War II. Nonetheless, difficulties continueto arise as to whether a person signing an instrument on behalf of acorporation incurs personal liability or whether he merely authenticatesthe signature of the corporation.

Both section 52 of the Canadian Act and the comparable section 26in the British Act 50 effectively provide that the signor becomes personallyliable unless he expressly states in writing that he is signing in arepresentative capacity. This provision has been commented upon asfollows in Falconbridge:

A man who puts his name to a bill makes himself personally liable,unless he states upon the face of the bill that he subscribes for anotheror by procuration of another, which are words of exclusion. Unless he saysplainly, "I am the mere scribe," he is liable.51

Byles quotes Lord Ellenborough to the effect that a signor is personallyliable "unless ... he states upon the face of the bill that he subscribesit for another; unless he says plainly, 'I am the mere scribe'". 52

This strict requirement has not been followed in corporate practice.The common method of signing corporate cheques includes the printedname of a corporation with dotted lines underneath bearing signatures,usually duplicated, of the signing officers without any words such as"per", "for" or "on behalf' to indicate representative capacity. Sucha method of signing cheques was recognized as the signature of thecorporation in question by the Ontario Court of Appeal in H.B. EtlinCo. v. Asselstyne53 and Albert Pearl (Management) Ltd v. J.D.F BuildersLtd.54 In the latter case the Court of Appeal's decision on this pointwas affirmed by the Supreme Court of Canada. 55

In 1980, the case of Holtz v. G & G Parkdale Refrigeration Ltd.56came before the Ontario Supreme Court. The cheque in question hadthe name of the corporation, "G & G Parkdale Refrigeration Ltd.",printed at the bottom with the signature "George Zafir" appearingunderneath. Hollingworth J., having quoted the passage from Falcon-bridge referred to above57 and, having reviewed the authorities, came

50 45 & 46 Vict., c. 61.51 Supra note 7, at 600.52 BYLES, supra note 25, at 57.53 [1962] O.R. 810, 34 D.L.R. (2d) 191 (C.A.).54 [1973] 1 O.R. 594, 31 D.L.R. (3d) 690 (C.A. 1972).55 J.D.F. Builders Ltd. v. Albert Pearl (Management) Ltd., [1975] 2 S.C.R. 846,

49 D.L.R. (3d) 422 (1974).56 30 O.R. (2d) 513, 117 D.L.R. (3d) 185 (H.C. 1980).57 Supra note 7, at 600.

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to the conclusion that "there is no evidence on the face of the chequeto indicate that [Zafir] signed the cheque in a representative capacity". 58

The judge thus adhered to the strict interpretation of a signor's liability.Two years later, Holtz was overruled by the Ontario Court of Appeal

in Allprint Co. v. Erwin.59 In this case the name of the company wasprinted once at the top of the cheque and again at the bottom. Underthe lower name were two lines on which the name "Edwin Grant"was written. Dubin J.A., delivering the judgment of the Court, followedH.B. Etlin60 and Albert Pearl61 and overruled Holtz. In his view thesignature was obviously the signature of the limited company, therefore,the cheques in issue were those of the corporation. In so holding theCourt restored an interpretation of section 52 that is more in line withcurrent commercial practice. 62

Where, however, it is not obvious on the face of the instrumentthat it is issued by a corporation, the signor will be held personallyliable. The endorsement on a promissory note in Dubg v. Gray63 read"Pay to the Order of the Bank of Nova Scotia La Cie. Gasprsiennede Construction Ltre.", followed by the signature underneath of "M.Regina Gray". Abbis J. found that this was a case in which the generalrule of personal liability should apply as the defendant had not indicatedshe was signing in a representative capacity.

In the factually complicated case of Bank of Nova Scotia v.Radocsay64 the Ontario Court of Appeal held the defendant personallyliable on a promissory note for two reasons. Firstly, the note wasunqualifed and secondly, there was not the slightest hint that the defendanthad signed in a representative capacity. The defendant had signed apromissory note in favour of the bank to cover an overdraft on apartnership account. The partnership business had then been taken overby Radocsay Television Ltd., an incorporated company. However, theaccount continued to be carried as a partnership account. When thedefendant had signed the note, he had believed he was signing on behalfof the company. Unfortunately, the promissory note bore only hissignature and contained no reference whatsoever to Radocsay TelevisionLtd. The company subsequently went bankrupt. When the Bank suedthe defendant personally on the note, the trial judge found him notliable. On appeal, Weatherston J.A., with whom Lacourci~re J.A. con-curred, reversed the trial judge, finding the defendant personally liable

-1 Supra note 56, at 527, 117 D.L.R. (3d) at 199.-9 38 O.R. (2d) 13, 136 D.L.R. (3d) 587 (C.A. 1982).60 Supra note 53.61 Supra note 55.62 See Alper, Personal Liability on Corporate Cheques: The Conflict Between

Commercial Integrity and Common Sense, 7 CAN. Bus. L.J. 224 (1982); Baxter, Comment,61 Can. B. Rev. 515 (1983).

63 32 N.B.R. (2d) 709, 78 A.P.R. 709 (Q.B. 1980).64 33 O.R. (2d) 785, 125 D.L.R. (3d) 651 (C.A. 1981).

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on the note for the reasons given above. A further reason was thatthe Bank did not have all the papers usually required to open a newaccount. Also, the Bank dealt solely with the defendant. There was noevidence that either party treated the account as the corporation's accountand not as the defendant's account. In his dissenting judgment Blair J.A.agreed that the note as signed created personal liability. Nonetheless,he would have granted relief on the ground that a mistake as to thetrue legal effect of the document had been induced by innocentmisrepresentation, therefore the defendant had been "misled by the courseof dealings" and an injustice would result if the note were enforced.65

In Canadian Acceptance Corp.66 a promissory note issued by acorporate member was signed:

Noye & Raynor Construction LimitedJohn Raynor, Sec. TreasurerMilford Noye, President.

On the reverse side of the note was an endorsement waiving presentmentand protest and allowing the holder to compromise or release any rights.The endorsement was immediately followed by the signatures:

John RaynorMilford Noye.

The holder of the note brought an action against the corporation andthe endorsers personally. The Prince Edward Island Supreme Court foundboth the defendants liable. It found the endorsers personally liable astheir signatures to the endorsement did not indicate that they had signedin any representative capacity. The Court held that unless the note isambiguous on its face, no evidence can be heard to establish the characterin which the person signed, a principle that applies to any endorsement.This is clearly a strict application of the concept of personal liability.The two endorsers had signed on the face of the note as officers ofthe corporation and there does not appear to be any reason to haveendorsed it in their personal capacity.

IV. INCOMPLETE INSTRUMENT

The problem of the incomplete instrument was dealt with in TransCanada Credit Corp. v. Ramsay.67 As security for a loan, the defendantsgave the plaintiff a promissory note and a chattel mortgage. Thedefendants maintained that at the time they signed the note, the rateof interest had not been filled in. Rather, it was inserted at a later time

65 Id. at 794, 125 D.L.R. (3d) at 660-61.66 Supra note 49.67 27 Nfld. & P.E.I.R. 144, 74 A.P.R. 144 (P.E.I.S.C. 1980).

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without their authority. Conversely, the plaintiffs branch manager statedthat the note had been completed prior to the signing. The judge didnot find it necessary to decide this issue as he came to the conclusionthat the note had been filled in within a reasonable time of havingbeen signed and with the authority of the defendants in accordancewith sections 31 and 32. Even if the rate of interest had not been filledin at the time of the signing, no evidence was introduced to indicatethat it had not been included within a reasonable time. Concerningthe rate of interest, there was sufficient evidence that the defendantsshould have concluded they were getting the loan at a rate usual forthis type of loan. Their failure to inquire as to the rate appeared togive the plaintiffs the authority to fill in the interest at the usual rate.The Court then considered the Unconscionable Transactions Relief Act68

and found that the transaction was not harsh and unconscionable. Therate of interest charged was 25.72 percent per annum.

A similar factual situation arose in Central Trust Co. v. Chislett.69

Again, the defendant claimed that the unauthorized higher interest ratewas inserted after he had signed the promissory notes. The Court followedTrans Canada Credit Corp.70 and held that if the notes were blank,the plaintiff is presumed to have had the authority of the maker tofill them in and the onus is on the maker to prove an unauthorizedcompletion. It appears that these two cases proceeded on the presumptionthat an instrument is deemed to have been filled in pursuant to authorityand that the onus is on the maker to show otherwise.71

V. HOLDERS

A. Rights of a Holder

When a holder of a bill72 tries to enforce payment, the issue isfrequently to what extent this right is affected by the equities arisingfrom the initial transaction from which the bill issued. When the holderis a holder in due course, he holds the bill free of any prior equities.

In Royal Bank of Canada v. Davis73 the Bank was a holder ofpromissory notes signed by a husband and wife. The wife denied theindebtedness, claiming that any consideration was paid to the defendant

68 R.S.P.E.I. 1974, c. U-2, subs. l(a), (e), s. 2.69 39 Nfld. & P.E.I.R. 260, 111 A.P.R. 260 (Nfld. S.C. 1982).70 Supra note 67.

71 See S. Cohen & Son Ltd. v. Hoddinott, 46 M.P.R. 86, 29 D.L.R. (2d) 69 (Nfld.S.C. 1961).

72 A "holder" is defined in section 2 as "the payee or endorsee of a bill or notewho is in possession of it, or the bearer thereof'.

73 32 B.C.L.R. 162 (Cty. Ct. 1981).

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husband and not to herself. Her defence was a total failure of con-sideration. There is a presumption that every party to a bill has givenvalue,74 however, this presumption is rebuttable. The evidence showedthat the wife had never been a customer of the bank, that she hadnot attempted to borrow money and that the amount of the promissorynotes had been deposited into a business account in the husband's name.The wife thus rebutted the presumption and the Court found a failureof consideration. The possibility of a wife signing as accommodationparty was not raised. This case appears to be based on the propositionthat consideration must flow from the promisor to the promisee. Thisproposition has no foundation in the law of contract and the case waslater overruled.75

In Seaway Trust Co. v. PSA Insurance Brokers Ltd.76 it was heldthat equities originating from an agreement between the borrower, themaker of a promissory note and a third party are not available againstthe payee, the holder of the note. A numbered Ontario company enteredinto an agreement with PSA whereby the numbered company agreedto cause Seaway Trust, which was controlled by the same individualas the numbered company, to make a loan to PSA. PSA then issueda note in Seaway's favour. Seaway Trust was not a party to the agreementbut the agreement was mentioned in the note. The ratio of the casewas that "the law will not saddle the lender with the equities betweenthe borrower and a third party on the basis of an agreement to whichthe lender was not a party". 77

B. Holder in Due Course

Holding in due course is a unique attribute of a bill of exchange.A holder in due course, unlike an assignee of a contract or other chosein action, holds a bill free of all equities which arose between the priorparties to the bill. He obtains a title which is good against the wholeworld, even to the exclusion of the true owner. These special rightsof a holder in due course are foreign to the common law and originatedwith the law merchant. The requisites of a holder in due course arestated in section 56 and his rights in section 74. It is due to these specialprivileges enjoyed by a holder in due course that the courts are oftenasked to determine whether a holder of a bill is a holder in due course.78

Whether holders of promissory notes were holders in due course

74 Sub. 58(1).75 See Bank of Montreal v. Danial, 46 A.R. 64, at 65 (Q.B. 1983).76 4 O.A.C. 128 (Div'I Ct. 1984).77 Id. at 130.78 See Geva, Equities as to Liability on Bills and Notes: Rights of a Holder Not

in Due Course, 5 CAN. Bus. L.J. 53 (1980) for an examination of the rights of a holdernot in due course.

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was an issue in Hoeller v. Roberts,79 a case comprised of eight actionsinvolving common issues of law and fact. In each of these actions thedefendant agreed to purchase exotic cattle from a Co-operative andgave the Co-op a promissory note or a post-dated cheque as part ofthe purchase price. The Co-op then negotiated these instruments tovarious small investors. It also gave those investors its own coveringnote as security for the notes discounted. Most of the defendants didnot receive their cattle. The notes remained unpaid and the Co-op wentbankrupt. In the action by the holders-investors against the makers-purchasers, several issues were raised. The first was whether the noteswere consumer notes under Part V of the Act.80 The judge found thatthe objective of the purchasers was to resell the cattle rather than tokeep them as pets. Therefore, the purchases were not consumer purchasesand Part V was not applicable. The defendants also claimed that theycould raise the non-delivery of cattle as failure of consideration againstthe holders as endorsees. They supported this contention on two grounds.Firstly, they relied on the St. Pierre doctrine,81 claiming that a closeassociation between the plaintiffs and the Co-op prevented them frombeing holders in due course. However, the judge found the case at barto be distinguishable from the St. Pierre case. Secondly, they claimedthat the plaintiffs had actual knowledge of the non-delivery of the cattle.Again, the judge found that the plaintiffs did not have the requirednotice. The last issue was whether the notes were endorsed in the senseintended by the Act or assigned as collateral security for notes issuedby the Co-op. The judge found that it was the Co-op notes which werecollateral to the defendants' notes. This case is indicative of thecomplexity of the law of Bills of Exchange: it is surprising how manyprima facie valid issues may arise in relatively simple factual situations.

The Supreme Court of Canada was given an opportunity to examinethe involved problem of a holder in due course in the factually complexcase of Williams & Glyn's Bank v. Belkin Packaging Ltd.82 Belkin agreedto buy a paper-making machine from Millspaugh Ltd., the balance ofthe purchase price to be paid by a number of promissory notes payableto the order of Millspaugh and insured by the United Kingdom ExportCredits Guarantee Department. The vendor was to discount these noteswith the Williams & Glyn's Bank to finance the sale. A dispute laterarose between the vendor and the purchaser regarding the performanceof the contract. The Bank then sued on the notes and the issue beforethe Court was whether the Bank could enforce them as a holder indue course or, failing that, as a holder for value. The Court examined

79 19 B.C.L.R. 333 (Cty. Ct. 1980).80 Ss. 188-192.81 Federal Discount Corp. v. St. Pierre, [1962] O.R. 310, 32 D.L.R. (2d) 86 (C.A.).82 [1983] 1 S.C.R. 661, 21 B.L.R. 282, aff'g 28 B.C.L.R. 96, 123 D.L.R. (3d)

612 (C.A. 1981).

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the requirements of section 56, the meaning of defect of title and thepersonal defences and then reviewed the relevant authorities. It foundon the evidence that the issuance of the notes was the result of a schemearrived at by Belkin, the Bank and the vendor. The purpose of the schemewas to issue a note which could be replaced by Belkin several timesin order that the final note would mature on the date specified in thepurchase agreement. However, this serial arrangement gave rise to adefect of title in the notes because it failed to meet the requirementsof free negotiability provided by the Export Credits Guarantee Depart-ment. As the Bank had participated in the scheme, it had notice ofthe arrangement and, consequently, was not a holder in due course.Of special interest is Mr. Justice Estey's quotation from the judgmentof Kelly J.A. in St. Pierre:

It is not necessary for the support of ordinary commercial transactionsthat the holder of a bill of exchange should under all circumstances bepermitted to shield himself behind the guise of a holder in due course andattempt to separate his character as holder in due course from the debilitatingeffect of facts and circumstances actually known to him at the time heacquired the bill or which were reasonably inferable from facts andcircumstances which were brought to his knowledge.

In the examination of any transfer to decide if it constituted the transfereea holder in due course the plaintiffs actual involvement with the transferorwill be a major factor, on this account the whole relationship between theplaintiff and its transferor must be examined and considered. 83

The Court then discussed the position of the Bank as a holder for valuenot in due course. As a holder for value, the Bank did take its billsubject to any defects of title but not personal defences; however, theCourt held that the determination of this issue depended on arbitrationprovided for in the contract. The case is important for its review ofthe legal issues associated with holding in due course and its emphasisthat a major factor in determining holding in due course is the holder'sactual involvement with the transferor.

C. Payee as a Holder in Due Course

It has long been accepted as settled law that a payee cannot bea holder in due course.84 This position was propounded by Lord Russelof Killowen C.J. in Lewis v. Clay85 on the ground that for someoneto be a holder in due course, a bill must be negotiated to him; however,a bill is not negotiated but is issued to a payee.86 The House of Lords

83 Id. at 677-78, 21 B.L.R. at 301.84 Supra note 7, at 625; BYLES, supra note 25, at 33, 185-86; B. RILEY, THE

LAW RELATING TO BILLS OF EXCHANGE IN AUSTRALIA 83, 118-19 (2d ed. 1964); WEAVER& CRAIGIE, BANKER AND CUSTOMER IN AUSTRALIA 307 (1975).

85 67 L.J.Q.B. 224 (1897).86 See the definition of "issue" in section 2.

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approved this statement in the case of RE. Jones Ltd v. Waring & Gillow,Ltd,87 which has been followed in Canada.88 The authority of Joneshas been recently re-affirmed in Royal Bank of Canada v. PentagonConstruction Maritime Ltdc89 In this case Miramichi Glass, to cover itsindebtedness to the Royal Bank, assigned to the Bank all monies dueto Miramichi under a contract with Pentagon. The Bank notifiedPentagon of this arrangement and issued a direction that all paymentswere henceforth to be made jointly to the Bank and Miramichi. A chequewas issued by Pentagon on the condition that Miramichi carry out thecontract. The Bank was purportedly made aware of that condition.Miramichi failed to carry out its obligations and Pentagon stoppedpayment of the cheque. The Bank sought to recover the proceeds asa holder in due course. The Court held that the Bank, as a payee, couldnot be a holder in due course. Further, having found the Bank to beaware of the condition, the Court held that the Bank could not satisfythe requirements of paragraph 56(l)(b) to qualify as a holder in duecourse.

VI. LIABILITIES OF PARTIES

A. Drawee

The drawee is under no obligation towards the holder of a billto accept or pay the bill. There is no privity of contract between thedrawee of a bill and the holder unless it is created by some agreementcollateral to the bill.90 The drawing of a bill does not operate as anassignment of funds and the drawee who does not accept the bill isnot liable on the bill.91 These principles were applied in Bank of Montrealv. 1? & R Entertainment Ltd 92 The defendant company borrowed moneyfrom the plaintiff bank and the loan was guaranteed personally by severalco-defendants. The company, which operated two business accounts atthe Bank, issued two cheques payable to the City of Moncton. On theday the cheques were presented for payment the Bank learned that thecompany had been put into receivership and dishonoured the cheques.It also seized monies in the company's account to satisfy the loan. Later,in order to avoid threatened legal action by the City of Moncton onthe dishonoured cheques, the Bank released the seized accounts outof which it paid the cheques. Had the Bank not paid the cheques, the

87 [1926] A.C. 670 (H.L.).88 Supra note 7, at 625.89 45 N.B.R. (2d) 148, 143 D.L.R. (3d) 764 (Q.B. 1983).90 Supra note 7, at 749.91 S. 127.92 49 N.B.R. (2d) 210 (Q.B. 1983).

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credit balance in the accounts would have been sufficient to repay theloan and there would have been no need for recourse against theguarantors. The Court dismissed the action against the guarantors,holding that the Bank as a drawee was under no obligation to honourthe cheques payable to the City. Therefore, when the Bank paid thecheques of its own accord, it did so using its own money. Once theBank seized the accounts, the loans were considered satisfied and theBank had no further claims against the guarantors.

B. Accommodation Bill

An accommodation bill has been described as "a bill acceptedor indorsed [sic] without value by the acceptor or indorser [sic] toaccommodate the drawer, or some other party; i.e. that the partyaccommodated may raise money upon it, or otherwise make use ofit".93 The liability of an accommodation party94 has been the subjectof several recent cases.

The Supreme Court of Canada applied the principle that anaccommodation party is liable on the bill to a holder for value, whetheror not such holder knows he is an accommodation party.95 In Molotv. Monette96 Lorne Mollot (the husband) owed money to Monette andgave him post-dated cheques to cover the debt. Subsequently, Monetteasked Lorne Mollot to also give him a promissory note which Monettecould use as collateral to maintain his line of credit at the bank.Subsequently, Margaret Mollot (the wife) also signed the note atMonette's request. Laskin C.J.C. (as he then was) stated that the wifealleged that "she signed the note to accommodate her husband so thatthe respondent could bolster his bank credit".97 Casey J.A., in a QuebecCourt of Appeal decision, quoted a transcript from the trial statingMargaret Mollot "signed the said note purely and simply to accommodatethe Plaintiff [Monette] who had represented to [her] husband that theaddition of [her] signature thereon would enable him to maintain hisline of credit".98 Thus, there is a divergence of judicial opinion as towho was the party accommodated, Monette or the husband. However,Monette did not use the note in that way, rather he immediately suedthe appellant and her husband on the note. The husband did not contestthe suit at trial, but the wife did so and failed. Ste. Marie J. held boththat Monette was a holder in due course and that the wife was liable

93 BYLES, supra note 25, at 222.94 Sub. 55(1).95 Sub. 55(2).96 [1981] 2 S.C.R. 133, 128 D.L.R. (3d) 577.97 Id. at 134, 128 D.L.R. (3d) at 577.98 [1977] C.A. 492, at 493.

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as an accommodation party to Monette as a holder for value.99 Thedecision was confirmed by the Quebec Court of Appeal using section 55of the Bills of Exchange Act. 00 On appeal, Chief Justice Laskin firstexpressed the view that the payee of a promissory note cannot be aholder in due course vis-a-vis the maker, although in the present caseit was not necessary to decide the matter.10' The central issue was whetherthere was consideration for the appellant wife's signature and, if not,whether she was nonetheless liable as an accommodation party undersection 55. The Court held that although the antecedent debt was goodconsideration for the husband, 02 it did not constitute consideration withrespect to the appellant wife. Thus, the wife was not liable on the notedue to failure of consideration. However, there still remained thepossibility of liability as accommodation party. For this liability to arise,it is essential, inter alia, that the payee, the respondent in this case,be a holder for value. 03 The Chief Justice found that the respondentwas "a holder for value of the note, given as it was for an antecedentdebt to the respondent". 04 A similar conclusion had been reached bythe trial judge and accepted by the majority of the Court of Appeal, 0 5

yet the correctness of this conclusion is doubtful. It is to be rememberedthat the husband gave Monette post-dated cheques to cover his indebted-ness. Clearly the consideration for these post-dated cheques was theantecedent debt. Then, in addition to these cheques, the husband gaveMonette the promissory note in question in reference to the same debt.Nowhere is it stated in the reports that the post-dated cheques wereretired, cancelled or replaced by the promissory note. It thus appearsthat the debt was covered twice, once by the cheques and again bythe promissory note. It is the author's view that Monette gave noconsideration for the promissory note. The original debt's value asconsideration was exhausted by the transaction involving the post-datedcheques. Such debt could not serve again as consideration for thepromissory note. If the author's submission is correct, the payee wasnot a holder for value, the requirements of paragraph 55(1)(b) werenot satisfied and the appellant should not have been held liable on thenote.

In Macleod Savings and Credit Union Ltd. v. Kiffiak'0 6 two officersof a limited company signed a promissory note in favour of the plaintiff.The purpose was to accommodate the company which then borrowedmoney from the credit union. The promissory note was for the principal

99 [1975] C.S. 108 (1973).100 Supra note 98.101 Supra note 96, at 135, 128 D.L.R. (3d) at 578.102 Para. 53(1)(b).103 Para. 55(1)(b).104 Supra note 96, at 136, 128 D.L.R. (3d) at 579.105 Supra note 98.106 36 A.R. 626 (Q.B. 1982).

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amount with a specified rate of interest from the date of advance. Thisdate was not stated on the note. The Court followed the very similarcase of Macleod Savings and Credit Union v. Perrett'0 7 and dismissedthe action as the note was not for a sum certain of money.

The liability of a wife who co-signs a promissory note with herhusband was again the subject of litigation in Bank of Montreal v.Danial.0 8 Having already obtained judgment against the husband, theplaintiff brought an action against the wife, whose only defence waslack of consideration. The evidence of the wife was, to quote the Master,"remarkably similar to the facts in Royal Bank of Canada v. Davis"'0 9

and counsel for the wife relied on that case. The Master declined tofollow the proposition there stated that consideration must flow fromthe promisee to the promisor. While consideration must be given bythe promisee, it does not have to flow to the promisor. Here the plaintiffmade a loan in consideration of the promises of the co-signor. Therewas consideration and the fact that one of the promisors, the wife, didnot benefit from it was irrelevant. In addition to her liability as makerof the promissory note, she was also held liable as an accommodationparty under section 55. The Master commented that the financialinstitutions of this country hold thousands of promissory notes co-signedby spouses where the co-signor could say that he or she did not deriveany benefit from the loan." 10

Another case of a wife as co-signor of a promissory note is Bankof Nova Scotia v. Anderson."' The husband withdrew from the pro-ceedings and, therefore, the action for the unpaid balance of the notewas brought against the wife alone. Several defences were pleaded. First,the wife claimed that the note was signed for the accommodation ofher husband and that no consideration passed to her. The Court ruled,without giving any reasons, that this was not a defence to the Bank'sclaim. The wife then pleaded lack of presentment for payment and wantof notice of dishonour. The Court, referring to Falconbridge,112 ruledthat neither of these defences was available to an accommodation party.The next defence pleaded was non est factum. The Court found nofraud or misrepresentation of the character of the instrument and heldthat the defence of non est factum had not been established. The wifealso claimed that when she went alone to the bank to co-sign the note,it was not suggested to her that she should get independent legal advice.The Court ruled that it was not necessary that she be shown to havehad independent legal advice and referred again to Falconbridge.1 '3 This

107 Supra note 40.108 Supra note 75.109 Id. at 65.110 Id. at 66.111 43 N.B.R. (2d) 137, 113 A.P.R. 137 (Q.B. 1982).112 Supra note 7, at 616-21."3 Id. at 677.

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is a rather surprising reference, considering that the edition referredto was published in 1969 and since that time such cases as Lloyds BankLtd v. Bundy,'1 4 McKenzie v. Bank of Montreal 1 5 and Royal Bank ofCanada v. Hinds'l6 have all stressed the importance of independentadvice. Finally, the Court found that as the note read "I promise topay" and was signed by both defendants, their liability was joint andseveral under subsection 179(2) of the Act. It is submitted, however,that subsection 179(2) is a procedural provision stating under whatcircumstances liability is joint and several, rather than a substantiveprovision determining when liability arises. In any event, the wife wasliable under subsection 55(2) as an accommodation party. Curiously,the judgment does not contain any precedents, there are only the tworeferences to Falconbridge and the one to subsection 179(2) of the Act.

The duties of a banker to the co-signor of a promissory note weredealt with in two New Brunswick decisions. Bank of Nova Scotia v.MacLellan"17 was a sad case of a wife who co-signed a promissorynote and other documents for a loan to her husband. She testified thatshe went to the bank and signed the documents as a result of her husband'sthreat of physical violence against her. She knew that the arrangementsconcerned her husband's application for a loan to which she was opposedbecause of her husband's propensity to gamble and drink. The signingat the Bank lasted only a few minutes. She was directed to a cubiclewhere a Bank employee presented the papers to her without offeringany explanation or inviting any questions. The trial judge dismissedthe action because the Bank failed to ensure that the wife was fullyaware of the transaction and to advise her to obtain independent legaladvice.' 8 Although the Court of Appeal found, as did the trial judge,that there was no legal duress, the Court followed the similar case ofTalbot v. Von Boris' 9 where it was held that it is not enough for awife to sign under duress but that the Bank or one of its employeesmust also know about the duress. In the case at bar such knowledgewas not proved. On the issue of independent advice, the Court dis-tinguished Lloyds Bank120 and Hinds.121 Hughes C.J.N.B. expressed theopinion that the duty of a bank to apprise the customer and ensureindependent advice imposed in those cases stems from a form of fiduciaryrelationship between the bank and the customer. In the present case

"14 [1974] 3 All E.R. 757 (C.A.).115 12 O.R. (2d) 719, 70 D.L.R. (3d) 113 (C.A. 1976).116 20 O.R. (2d) 613, 88 D.L.R. (3d) 428 (H.C. 1978).117 30 N.B.R. (2d) 596, 70 A.P.R. 596 (C.A. 1980) (Hughes C.J.), 31 N.B.R.

(2d) 141, 75 A.P.R. 141 (C.A. 1980) (Ryan, Richard JJ.A.).118 Bank of Nova Scotia v. MacLellan, 28 N.B.R. (2d) 709, 63 A.P.R. 709 (Q.B.

1980).119 [1911] I K.B. 854 (C.A.).120 Supra note 114.121 Supra note 116.

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the wife had not been a customer of the Bank nor had she relied onthe Bank for advice. For these reasons the Court of Appeal found thewife liable on the note.122

Somewhat similar circumstances were present in Royal Bank ofCanada v. Savage.123 A wife co-signed a promissory note for a loanto her husband for the purchase of a car. The husband had a tendencytowards violence and had previously been placed under a bond to keepthe peace. The wife was fearful of an altercation. Moreover, she believedthat the car would serve as the collateral for the loan and that theBank's security would be limited to the car. After defaults in paymentoccurred, the Bank brought action on the note. The wife raised severaldefences. With respect to the defences of duress and undue influence,the Court followed MacLellan.124 As the Bank was unaware of any duressor undue influence the wife could not rely on these defences. The Courtfollowed the same precedent in rejecting the argument of lack ofindependent advice. Finally, it held that as the defendant knew she wassigning a promissory note and was aware of its contents, she couldnot rely on the defence of non estfactum.125

These cases seem to indicate that, at present, the courts are notinclined to adopt the more liberal approach to questions of uncon-scionability advocated in the last decade by Lord Denning in Bundy126

and followed in some Canadian cases. 127

C. Note and Mortgage

The situation in which a bank holds, as a security for a loan, botha mortgage of land and promissory notes was the subject of three recentAlberta cases. Paragraph 4 1 (1)(a) of the Alberta Law of Property Act12 8

provides that in an action brought on a mortgage of land, whether legalor equitable, the right of the mortgagee is restricted to the land to whichthe mortgage relates. 129 The question in such circumstances is, therefore,whether the mortgagee can sue on the promissory note.

122 Supra note 117.123 48 N.B.R. (2d) 117, 126 A.P.R. 117 (Q.B. 1983).124 Supra note 117.125 The Court in Savage did not refer to the decision of the Supreme Court of

Canada in Marvco Color Research Ltd. v. Harris, [1982] 2 S.C.R. 774, 141 D.L.R.(3d) 577. The judgment in Marvco disapproved of the distinction between the natureand content of a document. For a discussion of this decision see Hayek, RecentDevelopments in the Law of Contracts, 15 OTTAWA L. REv. 599, at 614-17 (1983).

126 Supra note 114.127 Supra notes 115-16.128 R.S.A. 1980, c. L-8.129 There is a similar provision in the Saskatchewan Limitation of Civil Rights

Act, R.S.S. 1978, c. L-16, s. 2.

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In Merit Mortgage Group v. Sicoli130 the defendant gave both a landmortgage and a promissory note to secure a loan. Both documents borethe same date and contained identical terms of repayment. The mortgageeforeclosed and brought an action on the note for the deficiency.Haddard J.A., delivering the judgment of the Court, found that themortgage and the note contained the same obligation. Consequently,the action on the note was in fact an action to recover the debt underthe mortgage and was barred by the Law of Property Act.

The facts were different in Canadian Imperial Bank of Commercev. Andrejcsik131 where Brennan J. found that the mortgage was to beadditional security for the indebtedness of the defendant and was notintended to replace the promissory note. Thus, paragraph 41(1)(a) ofthe Law of Property Act did not preclude the action on the note. Indistinguishing Merit Mortgage Group,132 it was noted that in the presentcase there had originally been two loans, one secured by a mortgageand one by a promissory note. Subsequently, the loans were reviewedand extended, and there were new promissory notes and additionalmortgages.

In Canadian Imperial Bank of Commerce v. Robertshaw 33 the Courtfollowed Andrejcsik.'34 This was an action against a father who co-signed a promissory note to accommodate his son. The son later obtainedan additional loan and executed an equitable mortgage. When the sondefaulted on the loan, the Bank foreclosed and sued the father as co-signor for the deficiency. Montgomery J. concluded that, the obligationunder the promissory note being completely distinguishable from themortgage, the action was not precluded by the Law of Property Act.

VII. DEFENCES

A. Forgery

Section 49 provides that a forged or unauthorized signature is whollyinoperative. No rights can arise under such a signature: in law it doesnot exist. Thus, when a drawer's signature is forged, the instrumentis not a bill of exchange as it is not "an unconditional order... signedby the person giving it".' 35 When an endorsement is forged there canbe no negotiation and a "holder" after the forged endorsement has noright to retain the bill or to enforce it against the parties prior to the

130 [1983] 5 W.W.R. 381,26 Alta. L.R. 232 (C.A.).131 [1984] 3 W.W.R. 153 (Alta. Q.B.).132 Supra note 130.133 54 A.R. 315 (Q.B. 1984).134 Supra note 131.135 S. 17.

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forgery. However, parties to the bill after the forgery do have rightsamong themselves. The application of section 49 is subject to statutoryestoppels,136 contractual estoppel137 and estoppel by conduct, repre-sentation or negligence. 38

1. Forged Endorsement

When a payee's endorsement is forged, subsection 21(5) is generallyapplicable. This section provides that where the payee is a fictitiousor non-existing person the bill may be treated as payable to bearer.Consequently, forged endorsements may be disregarded and the acceptoror drawee paying the bill may obtain discharge by payment in duecourse 139 and, therefore, a right to debit the drawer. The leading casein Great Britain on forgery and the fictitious payee is Bank of Englandv. Vagliano Brothers140 and, in Canada, Royal Bank of Canada v. ConcreteColumn Clamps (1961) Ltd 141

The Supreme Court of Canada followed Vagliano in Fok CheongShing Investments Co. v. Bank of Nova Scotia.'42 In this case Chan, apresident and signing officer of the investment company, drew a chequefor $20,000 payable to Mrs. Loong Wei by way of return of herinvestment. Mrs. Loong Wei was a resident of Hong Kong. Chan forgedher endorsement on the cheque and cashed it. When the Bank debitedthe account of the investment company, the investment companycommenced the action. Mr. Justice Ritchie, delivering the judgment ofthe Court, found that the drawer, Chan, never intended the cheque tobe paid to the payee and that he fraudulently endorsed it in the payee'sname in order to obtain the proceeds. Ritchie J. applied the reasoningof Lord Herschell in Vagliano143 that when the payee is inserted merelyby way of pretence, without any intention that payment be made tohim, the payee is a fictitious person. Furthermore, he noted with approvalan illustration given in Falconbridge which states:

(3) If Martin Chuzzlewit is the name of a real person known to Bede,but Bede names him as payee by way of pretence, not intending that heshould receive payment, the payee is fictitious, but is not non-existing. 44

136 See section 129 for estoppel of the acceptor and section 133 for estoppelof the endorser.

137 For example, a contractual estoppel may be created by "verification agree-ments" between the customer and the bank.

138 See Rafferty, Forged Cheques: A Consideration of the Rights and Obligationsof Banks and Their Customers, 4 CAN. Bus. L.J. 208 (1980)

139 S. 139.140 [1891] A.C. 107.141 Supra note 14. See also Geva, Comment, 2 CAN. Bus. L.J. 418 (1977).142 [1982] 2 S.C.R. 488, 146 D.L.R. (3d) 617, aff'g 32 O.R. (2d) 705, 123 D.L.R.

(3d) 416 (C.A. 1981).143 Supra note 140, at 153.144 Supra note 7, at 486.

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Therefore, the drawee Bank was entitled to treat the cheque as payableto the bearer and debit the investment company account.

Morguard Trust Co. v. Bank of Nova Scotia145 was another caseof a forged endorsement. Although Morguard contained three issues, 146

only the discussion concerning the notice requirement of section 49 willbe discussed. Morguard drew a cheque on its account with the Bankof Nova Scotia, payable to a solicitor believed to be acting for thecompany. The solicitor's endorsement was forged, the cheque wascollected through the Royal Bank and Morguard's Bank of Nova Scotiaaccount was debited. Subsection 49(3) provides that where a chequebearing a forged endorsement is paid by the drawee bank and debitedto the drawer's account, the drawer has no right of action against thedrawee for the recovery of the amount so paid, unless the drawer givesthe drawee notice in writing within one year of learning of the forgery.The issue in Morguard was whether notice had been given within theone year period. Maloney J. cited the case of Bank of Montreal v.A.-G. Quebec,147 where the Supreme Court of Canada interpreted thesubsection as follows:

The rule is that a cheque paid upon a forged endorsement is neverthelessheld to have been paid in due course unless the client has given his bankerwritten notice of the forgery within one year after he learns of it. Noticeis essential to the creation of a claim against the banker, unless noticeis given, there is no claim. The mere payment of a cheque on a forgedendorsement does not give rise to any right against the banker, it is furthernecessary that the prescribed notice be given within the time limit.

Thus, section 49(3) and (4) does not establish a time for the prescription:a right that has not yet come into existence cannot become prescribed orextinguished. This section instead determines the nature and extent of theclient's right against his banker where the latter, contrary to the obligationhe has implicitly assumed, pays a cheque on a forged endorsement. Accordingto the terms of these provisions, the obligation to reimburse exists onlyif notice was given within the year in which the forgery became known;the two are inseparable since one is in a sense the counterpart of the other.148

In applying the subsection it was held that, although the plaintiff hadsuspicions about the transaction involving the cheque drawn in October1978, the actual forgery was not known until November 1979, at whichtime the plaintiff promptly gave notice to the drawee. In the trial judge'sopinion, "[subsection]49(3) refers to a drawer who has acquired notice

145 40 O.R. (2d) 211 (H.C. 1982), affd without reasons 44 O.R. (2d) 384 (C.A.1983).

146 The three issues were whether Morguard was estopped due to its negligencefrom relying on section 49, whether Morguard gave notice as required by section 49and whether the Bank was a holder in due course within the meaning of subsection165(3). For a discussion of the third issue see DEPOSITARY BANK AS A HOLDER IN DUECOURSE, infra.

147 [1979] 1 S.C.R. 565, 25 N.R. 330.148 Id. at 570-71, 25 N.R. at 336-37.

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of the forgery. It does not refer to a drawer of whom arguably it mightbe said that he may or ought to suspect forgery."' 149

Another case concerning a forged endorsement is Canada TrustCo. 150 The judgment contains a detailed examination of the precedentsdetermining the concepts of "fictitious" or "non-existing" payee.

No forgery occurs where the holder of a bill authorizes anotherto sign his name.' 5' This principle is illustrated in Re Bennett,152 a caseinvolving a rather naive attempt at fraud. Bennett picked up her mother'sallowance cheque and asked another person, Margaret Thompson, tohave a third person sign the mother's name on the back of the cheque.Thompson then cashed the cheque at Guaranty Trust by endorsing thecheque as a holder of a Guaranty Trust account. The mother later fileda statutory declaration that she never received the cheque in questionand asked for a second cheque. The fraud was discovered. The Courtheld that there was no forgery within the meaning of subsection 49.This section must be read with reference to section 4, which providesthat where a bill is required to be signed by any person, it need notbe signed by that particular person but may be signed by someone elseunder his authority. Where an endorsement is authorized by section 4,it cannot be a forgery under section 49.

2. Forged Drawer's Signature

In Canadian Pacific Hotels Ltd. v. Bank of Montreal 53 an employeeof C.P. Hotels forged the signature of his employer on a number ofcheques purportedly drawn by the company. Subsection 49(1) of theAct provides that where the signature of a drawer has been forged,the drawee bank will be liable for the loss unless the customer is precludedfrom asserting the forgery. In this case the Court found that the customer,C.P. Hotels, was so precluded because it failed to maintain an appropriatesystem of internal control to prevent or minimize forgeries. The dutyof a bank towards its customer is discussed later in this survey underthe heading Banker-Customer Relationship.

B. Discharge of Obligation

The rule that payment by means of negotiable instrument is primafacie conditional only and does not discharge the obligation until theinstrument is paid was re-affirmed in Northrup v. Taylor.154 There, the

149 Supra note 144, at 216.150 Supra note 8.151 S. 4.152 58 C.C.C. (2d) 401 (Ont. H.C.1981), aff'd, sub nom. R. v. Bennett, 37 O.R.

(2d) 142, 67 C.C.C. (2d) 250 (C.A. 1982).153 Supra note 12.154 31 N.B.R. (2d) 185, 75 A.P.R. 185 (C.A. 1980).

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purchaser of a house, Taylor, had insufficient funds for his down-payment.The vendor, Northrup, agreed to accept post-dated cheques signed bya Mrs. Jones, who was eventually to purchase the house. The chequeswere dishonoured and Northrup sued Taylor for the unpaid amountof the down-payment. The Court found that Taylor had contracted asa principal and was, therefore, liable for the outstanding balance.Regarding payment by the dishonoured cheque, the Court quotedFalconbridgel55 and Allen v. Royal Bank of Canada'56 to the effect thatwhen a bill is received in payment and nothing is said, the paymentis conditional only. The debt remains but any remedies are suspended.If the bill is dishonoured the holder maintains his right of action onthe debt.157

C. Material Alteration

Several issues were raised in Polish Combatants' Association CreditUnion Ltd v. Machnio 58 but those of conditional delivery and materialalteration are the most interesting. Machnio applied for a loan of $10,000from the Credit Union and delivered a note for that amount co-signedby the two other defendants, Moge and Pilozow. A loan in the amountof $5,000 only was approved and, although it was agreed that Machniowould pay only half of the instalments due under the note, the notewas not altered. Machnio encountered difficulties in meeting the pay-ments and a new scheme of repayments was agreed upon but againthe note was not changed. Eventually Machnio defaulted. In an actionon the note Moge and Pilozow claimed that the delivery had been subjectto the condition that Machnio would receive a loan of $10,000. A notemay be delivered subject to a condition by virtue of section 40. TheCourt was of the opinion, however, that there had been no deliverysubject to condition but rather an unconditional delivery followed bya partial failure of consideration. An alternative defence was that theagreed scheme of repayments, being different from the one containedin the note, constituted material alteration. The Court interpretedsection 145 as applying to an alteration to the note itself and not tochanges in the terms of the note or to the rights or obligations of theparties changed orally or by a document other than the note. 59

1-11 Supra note 7, at 798.156 41 T.L.R. 625 (P.C. 1925).157 For a discussion of the issue of sending a cheque for a smaller sum in full

satisfaction of a debt see Woodlot Services Ltd. v. Flemming, 24 N.B.R. (2d) 225,83 D.L.R. (3d) 201 (C.A. 1977).

1-8 24 Man. R. (2d) 1 (Cty. Ct. 1983).159 Section 145 provides, subject to exceptions concerning holders in due course

in subsection 145(2), that where a bill has been materially altered, it is void exceptagainst a party who himself made, authorized or assented to the alteration.

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VIII. CHEQUES

A cheque is a bill of exchange drawn on a banker and payableon demand. 160 The definition of banker has now been extended to includequasi-banking institutions, such as trust companies.161 At least two banksare associated with every cheque. The first bank is the one on whichthe cheque is drawn and which will eventually pay, or dishonour, thecheque - the so called drawee or payor or paying bank. The secondbank is the one that will collect the proceeds of the cheque, usuallyon behalf of its customer - the depositary bank or collecting bank.It is to be noted that a particular bank or even its branch can act ina dual capacity as both the paying and the collecting bank. 62

A. Depositary Bank as a Holder in Due Course

At common law, a depositary bank does not normally become aholder for value or a holder in due course as it is acting only as anagent for collection. 163 It will become a holder for value if it givesvalue for a cheque, for example, when it receives a cheque in paymentof a debt owed or when it allows a customer to withdraw the amountof the cheque prior to receipt of the proceeds. The mere crediting ofa customer's account as soon as a cheque is received and before clearancewill not make the bank a holder for value.164 The Canadian Bills ofExchangeActwas amended in 1966 by the insertion of a new subsection 3of section 165, providing that where a bank credits a customer's accountwith a cheque presented for collection, it becomes a holder in due courseof that cheque. 65 This amendment has been criticized as "subvert[ing]the structure of the Bills of Exchange Act", 166 and has been the subjectof considerable litigation.

The question of what constitutes a deposit within the meaning ofsubsection 165(3), thereby rendering the depositary a holder in duecourse, was considered in Canadian Imperial Bank of Commerce v. MayTrucking Ltd.167 A logging company received a cheque from MayTrucking. The president of the logging company took the cheque to

160 S. 165161 See INTRODUCTION, supra.162 See Carpenters' Co. v. British Mutual Banking Co., [1938] 1 K.B. 511 (C.A.

1937); Capital Assoc. Ltd. v. Royal Bank of Canada, 15 D.L.R. (3d) 234 (Que. S.C.1970), aff'd 36 D.L.R. (3d) 579 (Que. C.A. 1973), affd [1976] 1 S.C.R. v, 65 D.L.R.(3d) 384.

163 See Capital and Counties Bank Ltd. v. Gordon, [1903] A.C. 240 (H.L.).164 Supra note 7, at 615.165 An Act to Amend the Bills of Exchange Act, S.C. 1966-67, c. 12, s.4.166 Scott, The Bank is Always Right Section 165(3) of the Bills of Exchange Act

and its Curious Parliamentary History, 19 McGILL L.J. 78, at 78 (1973).167 56 B.C.L.R. 119 (C.A. 1984), affg 122 D.L.R. (3d) 189 (S.C. 1981).

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the Hope branch of the C.I.B.C. with a request that it be transferredto the account of the logging company at the C.I.B.C. branch at WilliamsLake. The Bank prepared a document called a "requisition for draft",which the president signed, and the transfer was duly made. The nextday May Trucking stopped payment of the cheque. C.I.B.C. broughtan action as a holder in due course under subsection 165(3) againstMay Trucking, the drawer of the cheque. May Trucking claimed thatthe cheque in question had not been deposited to the logging companyaccount but rather had been used to purchase a bank draft. The Courtof Appeal, affirming the trial judgment, held that the wholly internaldevice adopted by the Bank for accomplishing the requested transferdid not affect the application of subsection 165(3). The bank had infact credited the logging company with the amount of the cheque.

Bank of Montreal v. Lasqueti Fishing Co.168 is a complex case. Briefly,Lasqueti Fishing gave Banks Marine a cheque for $30,000 to enableBanks Marine to pay wages on a ship that they were completing forLasqueti Fishing. Banks Marine deposited the cheque at the Bank ofMontreal and obtained a draft for that amount payable to the NationalBank. The draft was to be used to obtain certified payroll cheques fromthe National Bank. Instead, the draft was used to reduce Banks Marine'sline of credit at that Bank. When Lasqueti Fishing heard that the proceedsof the cheque would not be used for payroll purposes it issued a stoppayment on the cheque. The Bank of Montreal, the depositary bank,sued, as a holder in due course, Lasqueti Fishing, the drawer of thecheque. The first issue was whether the Bank of Montreal was a holderin due course within the meaning of subsection 165(3). The Court ofAppeal affirmed the trial judgment that the Bank became a holder indue course when it credited the cheque to Banks Marine and issuedthe draft, "as long as it did so in good faith and without notice andthat was in fact the case because it had no knowledge of the stop-payment at the time of the transfer of the funds". 169 The second issuewas a claim against the National Bank for using the draft to reducethe line of credit. The Court found that although the National Bankwas originally told that a draft would be presented to cover the payrollcheques, there were no unusual circumstances to put the Bank on inquiryand the draft was not impressed with a trust in favour of Banks Marineemployees. The Court distinguished Barclays Bank Ltd v. QuistcloseInvestments Ltd 170 where a loan was made for the payment of dividendsand a cheque was paid into a separate account opened specifically forthat purpose. The Court in Barclays Bank held that such an arrangementgave rise to a relationship of a fiduciary character or trust. The thirdissue was whether the Bank of Montreal was entitled to recover the

161 43 B.C.L.R. 273 (C.A. 1982).169 Id. at 279.170 [1968] 3 All E.R. 651 (H.L.).

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full amount of the cheque having already sequestered some $8,000 fromBanks Marine. The Court held, following Cosgrave v. Boyle,171 that atcommon law the holder of a bill may sue a party to the bill for thefull amount in his own name. If the Bank recovered the full amount,it would hold the excess amount in trust. Pursuant to subsection 74(a),a holder can sue on a bill in his own name; therefore, the Bank didnot have to indicate that it was suing for the $8,000 in a representativecapacity.

In Toronto-Dominion Bank v. Jordan1 72 the Supreme Court of BritishColumbia considered whether the T.D. Bank, which claimed on adishonoured cheque as a holder in due course under subsection 165(3),had credited the account within the meaning of subsection 165(3) andhad acted in good faith. On the first issue it was held that, tracingthrough the chain of delivery, Judith Jordan had been credited withthe cheque and, furthermore, that crediting required no pay out. Inreaching this conclusion, the Court followed Canadian Imperial Bankof Commerce v. Gardner Watson Ltd 173 where the circumstances weresimilar to those in the present case. On the issue of good faith, theCourt stated, on the authority of Lasqueti Fishing,174 that a "good faith"test must be met in order to qualify as a holder in due course undersubsection 165(3). In determining whether the branch manager actedin good faith, the Court applied dicta of Lord Blackburn in Jones v.Gordon 75 and found that while the manager might have been careless,foolish or gullible, he had not been deceitful or dishonest and he hadnot refrained from asking questions in the fear that he would learnthat something was wrong.

In Morguard Trust176 the defendant Bank, which claimed to be aholder in due course under subsection 165(3), held the cheque undera forged endorsement. Maloney J. stated that subsection 165(3) refersto the "delivery" of the cheque. Section 40 provides that valid deliverymust be made "by or under the authority of the party drawing, accepting,or endorsing". Due to the forgery, there was no delivery within themeaning of section 40 and consequently no "delivery" under subsection165(3). Further, "holder" is defined as "the payee or endorsee of abill or note". 177 The existence of the forgery meant there had been noendorsement and, therefore, no endorsee-holder within the meaning ofthe Act. 78 For these reasons, subsection 165(3) had no application where

171 6 S.C.R. 165 (1881).172 52 B.C.L.R. 63 (S.C. 1984).173 43 A.R. 39, 25 Alta. L.R. (2d) 319 (Q.B. 1983).174 Supra note 168.175 2 App. Cas. 616, at 628-29 (1877).176 Supra note 145.177 S. 2.178 Under section 49, a forged or unauthorized endorsement is wholly inoperative.

See FORGERY, supra.

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a depositary bank "holds" the cheque under a forged endorsement. Tostate otherwise would negate subsection 49(1) of the Act.

The decisions in Morguard Trust179 and Lasqueti Fishing'80 areimportant in that they clarify the concept of a depositary bank as aholder in due course. It is not enough for a bank to receive a chequeand credit a customer, as a reading of subsection 165(3) appears tosuggest. It is also necessary to comply with other provisions of the Act,in particular sections 2 and 74. These two Court of Appeal decisionsrequire that to be a holder in due course within the meaning of subsection165(3), a depositary bank must first be a "holder" and then satisfythe test of "good faith".

B. Countermand of Payment

The duty and authority of a bank to pay a cheque is determinedby countermand of payment.' 81 While such countermand or stop paymentputs an end to the drawee bank's obligation to pay a cheque, it hasno effect on the liability of the customer as a drawer of a cheque. 182

Until recently the law clearly required a notice of countermand to beexact and unambiguous.183 Remfor Industries Ltd v. Bank of Montreal,84

a decision of the Ontario Court of Appeal, relaxed the requirementof exactness and introduced a new test of "reasonable accuracy". TheCourt quoted from an American decision, Shude v. American StateBank: 85 "the law does not require a perfectly detailed description, butinstead the notice is sufficient if the check is described with reasonableaccuracy".' 86 In Remfor all the particulars of the cheque were correctlystated except the amount which was written as $10,800 instead of thecorrect amount of $10,853. As leave to appeal to the Supreme Courtof Canada was refused, it is submitted that the test of reasonable accuracywill be followed. 87

179 Supra note 145.180 Supra note 168.181 S. 167.182 S. 130.183 Giordano v. Royal Bank of Canada, [1973] 3 O.R. 771, 38 D.L.R. (3d) 191

(C.A.), rev'd [1973] S.C.R. xiii, 38 D.L.R. (3d) 19 In.184 21 O.R. (2d) 225, 5 B.L.R. 22 (C.A. 1978), leave to appeal denied 25 N.R.

450, 5 B.L.R. 22n (1978).185 248 N.W. 886 (Mich. 1933).

86 Id. at 889.187 See Rodgers-Magnet, Inaccurate or Ambiguous Countermand and Payment over

Countermand, 4 CAN. Bus. LJ. 297(1980), for a commentary on this case and a discussionof bank practices.

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C. Payment over Countermand

When a bank overlooks a countermand and pays the cheque, apayment under a mistake of fact occurs. The question then arises asto whether the bank can recover from the payee. In Canada there isa line of cases stating that this question is to be answered in accordancewith equitable principles. This view is illustrated by the statement ofTritschler C.J.Q.B. in Shapera v. Toronto-Dominion Bank

There are equitable doctrines under which a person who pays the debtof another without authority may be allowed the advantage of the payment.This equity may be extended, if the circumstances justify, to a banker whopays a cheque without authority if it is shown that the payment dischargeda legal liability of the customer. The reasoning which supports the equityis put by Wright J. in B. Liggett (Liverpool) Ltd v. Barclays Bank Ltd, [ 1928]1 K.B. 48 at p. 64.188

Royal Bank v. Huber 89 was also decided on equitable principles andcited with approval in Shapera.

In England, the issue of payment under mistake of fact wasthoroughly reviewed in a scholarly judgment by Goff J. in Barclays BankLtd v. W.J. Simms Son & Cooke (Southern) Ltd 190 In this case a customerof Barclays Bank sent a cheque to a building company as a progresspayment. However, when he discovered that the building company hadbeen placed in receivership, he stopped payment of the cheque. Thebank overlooked the instruction and paid the receiver. When the receiverrefused to repay, Barclays brought an action against the building companyand the receiver. Goff J. stated that the case raised for decision thequestion of whether a bank which overlooks its customer's instructionto stop payment of a cheque can recover the money from the payeeas having been paid under a mistake of fact. The point was one onwhich there had been no decision in England. Having reviewed theauthorities at length, Goff J. formulated the following principles:

1. If a person pays money to another under a mistake of fact whichcauses him to make the payment, he is prima facie entitled to recover itas money paid under a mistake of fact.

2. His claim may however fail if: (a) the payer intends that the payeeshall have the money at all events, whether the fact be true or false, oris deemed in law so to intend; (b) the payment is made for good consideration,in particular if the money is paid to discharge, and does discharge, a debtowed to the payee (or a principal on whose behalf he is authorised to receivethe payment) by the payer or by a third party by whom he is authorised

188 [1971] 1 W.W.R. 442, at 448 (Man. Q.B. 1970).189 [1972] 2 W.W.R. 338, 23 D.L.R. (3d) 209 (Sask, C.A. 1971).190 [1979] 3 All E.R. 522 (Q.B.). For commentaries see Goode, The Bank's Right

to Recover Money Paid on a Stopped Cheque, 97 L.Q.R. 254 (1981); Reynolds,Countermand of Cheques, 15 U.B.C.L. REv. 341 (1981).

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to discharge the debt; (c) the payee has changed his position in good faith,or is deemed in law to have done so. 191

Applying the foregoing principles to the case, Goff J. held: (1) thatthe Bank's mistake was the cause of the payment of the cheque; (2) thatas the drawer had countermanded the cheque, the Bank acted withoutmandate and the payment did not discharge the drawer's obligation;and (3) that because no notice of dishonour is required in such a case,the payee is not deemed to have changed his position by virtue of failingto notify the defendants. 92 The Bank, therefore, succeeded in its actionfor recovery.

Royal Bank of Canada v. LVG Auctions Ltd 193 applied the reasoningin Barclays Bank.194 The facts of the two cases were not dissimilar.A customer of the Royal Bank purchased equipment from LVG Auctionsand gave them a cheque. The equipment was defective. The customerrefused to accept it and stopped the cheque. The equipment waseventually returned to its owner. The Bank overlooked the countermandand paid the auctioneer. When the mistake was discovered, the Bankcredited the customer's account and brought an action against LVGAuctions. Cromarty J. decided in favour of the Bank. His decision appearsto be based both on the principles stated in Barclays Bank and on theconcept of unjust enrichment. 95 The auctioneer would have obtaineda windfall had he been permitted to retain the money and the returnedequipment.

There is, however, a decision of the Saskatchewan District Courtwhere McIntyre J. felt compelled to follow not the reasoning of BarclaysBank but that of Royal Bank v. Huber.196 The case is Toronto-DominionBank v. Crown Real Estate & Insurance Ltd 197 Here again the Bankoverlooked the customer's countermand and paid the cheque. The chequewas a deposit on a lease. The deposit was forfeited when the lessee,the drawer of the cheque, repudiated the lease. McIntyre J. referred atlength to Barclays Bank and expressed the view that although the analysisof law and the statement of principles therein were excellent, the casewas of persuasive authority only. He felt obliged to follow the bindingdecision in Huber. Applying the equitable principles there outlined, heheld that it would be inequitable and unconscionable that the defendant

191 Supra note 175, at 535.192 Id. at 542. The statement that the payee is not deemed to have changed his

position is a reference to the principle in Cocks v. Masterman, [1824-34] All E.R.Rep. 431 (K.B. 1829).

193 43 O.R. (2d) 582 (H.C. 1983).194 Supra note 190.195 Reference was made both to Deglman v. Guaranty Trust Co., [1954] S.C.R.

725, 11954] 3 D.L.R. 785 and to Pettkus v. Becker, [1980] 2 S.C.R. 834, 19 R.F.L.(2d) 165.

196 Supra note 189.197 7 Sask. R. 58 (Dist. C. 1980).

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should return the money and he dismissed the action. Had he followedBarclays Bank he would presumably have found in favour of the plaintiff.We thus have a situation in which an Ontario court followed the authorityof Barclays Bank whereas a Saskatchewan court considered itself boundby the equitable principles stated in Huber, a decision of the SaskatchewanCourt of Appeal.

D. Banker-Customer Relationship

1. Joint Accounts

The liability of parties to a joint account for an overdraft was theissue in two cases. In Bank of Montreal v. Hancock9 8 an overdrawnaccount in the husband's name was converted into a joint account inthe names of both the husband and wife. The wife also co-signed apromissory note for a loan to her husband. The Bank brought an actionto recover the overdraft and the promissory note. Judgment was obtainedby default against the husband but the wife defended the action. TheCourt accepted the wife's evidence that she had no knowledge of theoverdraft and that she could not recall signing the note. The case raisedthe issues of the liability of one or two persons opening a joint accountfor an overdraft created without the knowledge of one of the personsand the obligation of a bank to advise the wife to seek independentadvice. On the first issue, there apparently being no Canadian authorityon this point, the Court followed the California Court of Appeal decisionin Faulkner v. Bank of Italy' 99 where it was held that an innocent jointowner who had not consented to the overdraft or to the actions of thefraudulent party and who had not derived any benefit from the funds,incurred no liability. On the second issue, the Court found that the Bankhad failed to alert the wife as to the advisability of obtaining independentadvice. Relying on the precedents, 200 the Court dismissed the actionon both issues.

Bank of Montreal v. Vaillancourt,20 1 an Ontario Court of Appealdecision, also dealt with liability on a joint account. Weatherston J.A.,referring to Bank of Montreal v. Hancock20 2 and Faulkner v. Bank ofItaly,203 stated that there is no general rule that both parties to a jointaccount are jointly liable to a bank for any overdraft in the account.Liability depends on the terms of the contract with the bank and mayalso be founded on agency, representation or estoppel. The sole fact

198 39 O.R. (2d) 82, 137 D.L.R. (3d) 648 (H.C. 1982).199 231 P. 380 (Calif. Ct. App. 1924).200 Supra notes 108-10. For other cases dealing with a wife's co-signing a note

see ACCOMMODATION PARTY, supra.201 22 B.L.R. 52 (Ont. C.A. 1983).202 Supra note 198.203 Supra note 199.

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that a person is a party to a joint account does not make him liableto the bank for an overdraft created by the other party. In the caseat bar, Vaillancourt and Watson opened a joint account. The Bank waspersuaded to credit the joint account immediately with the cheques sentby Watson from California. The Bank agreed to this arrangement, relyingon the integrity of Vaillancourt, who was a long-time customer. BothVaillancourt and Watson drew on the account and Vaillancourt knewof the overdraft created on the account from time to time. Eventuallyall but one of the cheques sent by Watson were dishonoured. Applyingthe principles stated above, the Court found Vaillancourt liable for theoverdraft even though he had been the victim of Watson's fraud.

2. Duty to Honour Customers' Cheques

The duty to honour custmers' cheques was the issue in ThermoKing Corp. v. Provincial Bank of Canada.204 In this case HamiltonTransport Refrigeration Ltd. operated an account at the Provincial Bank.The Bank frequently allowed the account to be overdrawn. Followingthe usual practice, Hamilton Transport, which was a franchised dealerof Thermo King, deposited several cheques to the account and askedfor a draft to pay Thermo King for refrigeration units it had ordered.The draft would have resulted in an overdraft. The Bank asked forand received certification of one of the large cheques deposited. Despitethis precaution, the Bank refused to issue the draft and, in fact, appointeda receiver for Hamilton Transport. Thermo King sued Hamilton Trans-port for the price of the refrigeration units and the Provincial Bankfor interference with contractual rights. Madam Justice Wilson (as shethen was) delivered the judgment of the Court and found that the Bankknew that if the draft were not issued, the contract between ThermoKing and Hamilton Transport would be breached. She stated that theBank intended to cause that breach and thus knowingly induced thebreach of contract, thereby committing the tort of interference withcontractual relations. Had it not been for this interference, the Bank'srefusal of the overdraft would have been justified. As stated by Paget,20 5

a banker is entitled to take any action necessary to safeguard his interests.The banker has this right except where there is a course of dealinggiving rise to a requirement of notice and the Court found that therewas such a course of dealing in this case. The case establishes twoimportant principles. First, where an overdraft is customarily granted,a notice of discontinuation must be given. Second, an intentional refusalto honour an obligation without justification may give rise to the tortof interference with contractual rights.

204 34 O.R. (2d) 369, 130 D.L.R. (3d) 256 (C.A. 1981), leave to appeal denied42 N.R. 352 (1982).

205 PAGET'S LAW OF BANKING 132 (8th ed. M. Megrah 1972).

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3. Clearing a Cheque

The duty of a drawer bank and a depositary arising out of thecollection of a cheque through the clearing system came before thecourts during the period under review. The leading case is Stanley Worksof Canada Ltd v. Banque Canadienne Nationae.20 6 Stanley Works hadan account with the Royal Bank. It presented two cheques drawn onthe Banque Canadienne Nationale (BCN) for collection. BCN, havingdoubts about the solvency of the drawer, held the cheques for 11 and4 days respectively, contrary to the Clearing House regulations whichprovided that unpaid cheques had to be returned within 48 hours. BCNreturned the dishonoured cheques, after some delay, to the Royal Bankwhich accepted the cheques and debited their customer. Stanley Worksbrought an action against BCN alleging BCN's responsibility for thedelays in breach of the Clearing House rules. The Court dismissed theaction on the ground that there was no privity of contract betweenStanley Works, the payee of the cheque, and BCN, the drawee bank.The Rules, while binding as between the Banks, were res inter aliasacta as regards Stanley Works and provided only an indication of whata bank might reasonably be expected to do. Stanley Works succeededagainst the Royal Bank which had failed to exercise reasonable diligencefor the protection of Stanley Works' interest in accepting the returnof the cheques after an undue delay. A verification agreement betweenStanley Works and the Royal Bank provided no defence as it did notcover neglect of duty. The required written notice had been waivedby implication. While the decision defines the duty of a depositary bank,the position of a drawee bank remains uncertain as the decision turnedon the doctrine of privity of contract and the binding force of the ClearingHouse rules. There are, however, obiter dicta in Vagliano Bros. ,207 acase followed on other points by the Supreme Court of Canada,20 8 tothe effect that the duty of a banker in all cases is either to pay orrefuse payment immediately.20 9

The recent case of Mak v. Bank of Nova Scotia210 distinguishedStanley Works.211 Mak deposited cheques at the Happy Valley branchof the Bank of Nova Scotia. The cheques were drawn on the GooseAirport branch of the Royal Bank. Despite the close proximity of thetwo communities, the clearing system took 36 days to return thedishonoured cheques. Unlike the situation in Stanley Works, the depositaryBank gave prompt notice to Mak and did not act negligently, the delays

206 [19821 R.L. 433, 20 B.L.R. 282 (Que. C.A. 1981). See Choquette, Comment,

60 CAN. B. REv. 746 (1982) for a commentary on this case.207 Supra note 140.208 Supra note 142.209 Supra note 140, at 141 (Lord Bramwell), at 159 (Lord Macnaghten)210 45 Nfld. & P.E.I.R. 322, 132 A.P.R. 322 (Nfld. S.C. 1983).211 Supra note 206.

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being due to ongoing changes to the clearing system. Furthermore, Makwas aware that the cheques would be dishonoured.

The delays of the drawee bank and the failure of the depositarybank to take action with respect to such delays formed the basis ofthe plaintiffs claim against two banks in National Slag v. CanadianImperial Bank of Commerce.212 Lebrone J. commented that while thecase involved many legal issues, it also raised one practical point ofconsiderable interest. A breach of contract or negligence does notautomatically result in damages. The plaintiff must prove that he hassuffered real damage as a result of the defendants' conduct and in thiscase had failed to do so.

4. Breach of Trust, Negligent Breach of Contract, Negligence andConversion

Breach of trust, negligent breach of contract, negligence andconversion on the part of a bank were at issue in Professional WeldingConsultants Ltd v. Bank of Nova Scotia.213 Professional and ColumbiaTrailer Co. were partners in the construction of stainless steel tanksfor Molson Brewery. Due to the fact that Columbia was a non-unionorganization, it was agreed between Professional/Columbia and Molsonthat all transactions would be conducted solely in the name of Pro-fessional. Glaser, the president and sole director of Professional, whoalso represented himself as the company's sole signing officer, openedan account in the name of Professional at the Bank of Nova Scotia.He deposited to that account two cheques payable to Professional, onean advance from Columbia for payroll for $20,000 and one from Molsonfor $120,000. He told the bank manager of the partnership ventureand asked him to issue a draft for $136,000 in United States fundsto Glaser personally for the purchase of equipment in the United States.Glaser later asked that the draft be exchanged for certified cheques,again payable to him personally. He cashed these cheques at anotherbank, absconded and eventually went to prison. An action was thencommenced by Professional and Columbia against the Bank of NovaScotia and the bank manger. Regarding the alleged breach of trust,the Court held that the relationship between the Bank and its customeris that of debtor and creditor214 and not that of trustee and beneficiaryor principal and agent. Therefore, any trust impressed upon the chequeby virtue of the Builders Lien Act215 can be imputed to the Bank onlyif it is a knowing participant, a fact which the plaintiffs failed to prove.In respect of negligent breach of contract, the Court stated that it is

212 140 D.L.R. (3d) 473 (Ont. H.C. 1982).213 [1983] 1 W.W.R. 614 (B.C.S.C. 1982).214 It is interesting to note that the authority for this statement, London Joint

Stock Bank Ltd. v. Macmillan, [1918] A.C. 777, at 789 (Lord Finlay), is not quoted.215 R.S.B.C. 1979, c. 40.

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the duty of a bank to exercise reasonable care and skill, such dutyarising out of the contract between banker and customer. Again, suchnegligent breach was not proved. Similarly, the plaintiffs failed todemonstrate negligence apart from contract. Concerning the allegationof conversion, the Court held that because the Bank of Nova Scotiahad acted in good faith and without notice of any defect of title, theBank discharged its obligations within the meaning of section 139216by payment in due course of the deposited cheques. These cheques hadbeen paid when the bank certified the six cheques for smaller amountsissued to Glaser personally. Discharge in due course extinguishes allrights or actions on the bill.217 Subsection 139(1) provides that ajudgmentin due course must be by or on behalf of a drawee or acceptor. Itis not stated in the report whether the Bank of Nova Scotia was alsothe drawee of the cheques issued by Columbia and Molson or whetherthe judge considered the certification of the small cheques as paymentof the two large cheques on behalf of the drawee.218

Another case of breach of trust and conversion arising out of thebanker-customer relationship is Bank of Montreal v. Tourangeau.219

Tourangeau was the sole corporate officer and shareholder of twocompanies. The two companies had current accounts with a branchof the Bank of Montreal. Tourangeau opened a personal account withthe co-defendant Royal Bank just across the street from the Bank ofMontreal branch location. The Royal Bank allowed Tourangeau todeposit cheques payable to the companies in his personal account andto withdraw most of the proceeds of those cheques. The two companiesfell into financial difficulties and executed general assignments of bookdebts to their banker, the Bank of Montreal. The assignments were dulyregistered under the Personal Property Security Act.220 Tourangeau thusobtained the proceeds of the cheques which he held in trust for thecompanies to convey to the assignee of the book debts, the Bank ofMontreal. The Bank of Montreal brought an action for conversion andbreach of trust. The unusual feature of this action was that it was notbrought by the payee companies but by the payee's creditor who heldthe assignment of book debts. With respect to the claim in conversion,Van Camp J. referred to Arrow Co. v. Bank of Canada221 and notedthat a cheque is both a chattel and a chose in action. The plaintiff bankheld the assignment of a chose in action but had no rights to the chequeitself and, therefore, could not sue for conversion. However, the plaintiff

216 Bills of Exchange Act, R.S.C. 1970, c. B-5.217 Supra note 7, at 792.218 See Arrow Transfer Co. v. Royal Bank of Canada, [1971] 3 W.W.R. 241,

19 D.L.R. (3d) 420 (B.C.C.A.), affd [1972] S.C.R. 845, 27 D.L.R. (3d) 81, for adiscussion of the conversion of cheques.

219 31 O.R. (2d) 177, 118 D.L.R. (3d) 293 (H.C. 1980).220 R.S.O. 1980, c. 375.221 Supra note 218.

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Bank did succeed in its action for breach of trust. There was "[e]videnceof circumstances reasonably giving rise to 'a suspicion of somethingwrong combined with a wilful disregard of the means of knowledge" 222

and, consequently, the depositary bank held the cheques in trust forthe plaintiff. It also followed that the Bank did not take the chequesin good faith and could not become a holder in due course undersubsection 165(3).223

The duties of a customer within the banker-customer relationshipwere dealt with in three cases. In Canadian Pacific Hotels Ltd v. Bankof Montreal224 Montgomery J. asked the rhetorical question: "What isthe duty a sophisticated customer owes to its banker? Is it the simpleduty of care in drawing the negotiable instrument stated in 1916? Shouldit be a higher duty based on estoppel?"2 25 He then stated that asophisticated commercial customer owes a duty to its bank to operatean efficient internal control system so that both bank and customerare engaged in the prevention and minimization of losses throughforgeries. In support of these conclusions, he quoted, inter alia, fromthe references to "commercial custom" in Bank of Montreal v. A.-G.Quebec226 and the obiter dicta of Laskin J.A. (as he then was) in ArrowTransfer227 that suggested a broader concept of a customer's duties.The Court held that C.P. owed a duty to its banker to examine itsbank statements with all reasonable care and to report discrepancieswithin a reasonable time. C.P. failed in this duty and its action againstthe Bank was dismissed. An appeal to the Ontario Court of Appealwas dismissed by the majority for the reasons 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 bankstatement and report discrepancies does not exist in Canadian law. Ifsuch a duty is to be imposed, it should be accomplished by Parliamentmodifying section 49, possibly along the lines of the United StatesUniform Commercial Code. In the alternative, perhaps the Supreme Courtof Canada should depart from the traditional interpretation of section 49.Leave to appeal to the Supreme Court of Canada has been grantedin this case, 228 with the result that until that Court has issued its judgment,the duty of the customer will remain unsettled.

222 Raphael v. Bank of England, 17 C.B. 161, at 174 (C.A. 1855) (Willes J.)as quoted in M.A. Hanna Co. v. Provincial Bank of Canada, 11935] S.C.R. 144, at161, [19351 1 D.L.R. 545, at 559 (1934) (Rinfret J.).

223 See DEPOSITARY BANK AS A HOLDER IN DUE COURSE, supra.224 Supra note 14.225 Id. at 561, 122 D.L.R. (3d) at 120. This is presumably a reference to Columbia

Gramophone Co. v. Union Bank of Canada, 38 O.L.R. 526, 34 D.L.R. 743 (S.C. 1916).226 Supra note 147.227 Supra note 218.228 [1982] 2 S.C.R. vi, 139 D.L.R. (3d) 575, at 576.

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In Morguard Trust229 the defence was that the alleged negligenceof the plaintiff estopped it from relying on section 49. The CP. Hotels2 30

case was extensively referred to by counsel. Maloney J. distinguishedC.P. Hotels on the grounds that although C.P. Hotels had been foundnegligent, Morguard Trust, while less careful than might have beendesirable, had not been negligent. Moreover, the object of Morguard'sinternal control system was to ensure that valid security was obtainedin respect of mortgage monies advanced, and not to protect the bank.Although the point was not discussed in the judgment, Morguard wouldprobably not fall under the description of a "sophisticated commercialcustomer" applied to C.P. Hotels.

Canada Trust Co. v. The Queen231 also referred to C.P. Hotels inconnection with the problem of the existence of two innocent parties.Cattanach J. stated that had the principle been open to him, he wouldhave held that the customer, having been in a better position to preventthe fraud, should bear the loss rather than the Trust Company whichhad cashed the cheques. 232

These attempts by the courts to free themselves from the shacklesof a rigid application of the provisions of the Bills of Exchange Actand to substitute broader general concepts of equity and common laware probably the most significant characteristics of the period underreview.

IX. PROMISSORY NOTES

The cases discussed under this heading contain issues which areeither specific to or closely associated with promissory notes. Liska v.Bank of British Columbia233 dealt with the presentment for paymentof a promissory note. Liska borrowed money from the Bank of B.C.and, as security signed a promissory note and hypothecated someemeralds. The Bank lost the emeralds. Liska sued the Bank for theemeralds and the Bank counterclaimed on the note. Liska argued thatas the note was payable on demand, demand for payment was a conditionprecedent to a right of action and further, due to the fact that the notewas payable at a particular place, presentment at the place of paymentwas also a condition precedent to the action. The Court reaffirmed theearly eighteenth century principle234 that where a promissory note ispayable on demand, presentment for payment is not necessary and an

229 Supra note 145.230 Supra note 12.231 Supra note 8.232 Id. at 742.233 27 A.R. 614, [1981] 4 W.W.R. 223 (Q.B.).234 Rumball v. Ball, 10 Mod. 38 (Q.B. 1711).

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action itself is a sufficient demand. Regarding presentment at the placeof payment, the Court followed the more recent interpretation of thesomewhat ambiguous section 183 stated in Canadian Bank of Commercev. Bellamy.235 In Bellamy the Court held that presentation is not necessaryagainst the maker but that, if the maker were sued before presentationand it appeared that he had sufficient funds to pay the note at theplace of payment, the Court should award costs against the plaintiff.The Bank was, therefore, successful in its counterclaim.

Royal Bank of Canada v. Evans236 also dealt with presentation ofa note. Co-defendant Esser borrowed money from the Royal Bank andEvans endorsed the note to facilitate the loan. Esser defaulted and theRoyal Bank sued Evans as endorser. Evans relied on section 85 whichprovides that a bill must be duly presented for payment and if not sopresented, the drawer and endorsers are discharged.237 The Bank claimedthat presentation had been excused under paragraph 91(1)(a) as themaker could not be found. The Court held that with the exercise ofreasonable diligence, presentment could easily have been effected. TheBank claimed further that presentment had been waived under para-graph 91 (1)(c) and indeed there was a declaration waiving presentmenton the back of the note signed by Evans. The declaration read: "Theundersigned hereby waives presentment, notice of dishonour, protestand notice of protest of the within note. '' 238 The Court interpreted thiswaiver as referring only to presentment and notice to Evans as endorserbut not as dispensing with the necessity of presentation to the maker.239

The failure to effect presentment to Esser proved fatal to the Bank'sclaim against Evans.

The confused case of Bank of Montreal v. Faulkner240 is interestingin that it applies the principle in Range v. Belvedere Finance Corp.241

That principle provides that where a promissory note is part of a chattelmortgage contract, it is not an unconditional order within the meaningof section 176 and, therefore, is not a bill of exchange.242 In Faulknerthe husband borrowed money from the Bank and gave in return a chattelmortgage on a truck. On the same day he and his wife co-signed apromissory note for the same amount as the chattel mortgage. When

235 8 Sask. L.R. 381, 25 D.L.R. 133 (S.C. 1915).236 21 Sask. R. 61, [1983] 1 W.W.R. 189 (Q.B. 1982).237 Section 186 makes the provisions of the Act applicable to promissory notes.238 Supra note 236, at 64.239 There is apparently an error in the report as the relevant sentence reads: "He

[Evans] did not waive his right to insist that the notes be presented to Evans [sic]and dishonoured before the bank was entitled to claim upon his endorsement". Id."Evans" should read "Esser" who, as a maker of the note, was primarily liable onit pursuant to section 185.

240 43 Nfld. & P.E.I.R. 256, 127 A.P.R. 256 (Nfld. Dist. C. 1983).241 [1969] S.C.R. 492, 5 D.L.R. (3d) 257.242 See Ziegel, Comment, 48 CAN B. REv. 309 (1970) for a discussion of this

case.

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the husband defaulted on the repayment of the loan, the Bank repossessedthe truck, sold it at undervalue and brought an action for the balanceof the loan against both the husband and the wife. As the wife hadhad nothing to do with the loan, her only liability could be on thepromissory note but the action was clearly on the loan. The judge adoptedthe reasoning in Range and held that the promissory note was notunconditional and dismissed the action against the wife. The correctnessof this application of Range is open to doubt, especially in view of therecent decisions in Industrial Acceptance Corp. v. Richard243 and Bankof Montreal v. Kon.244 It should be noted that the mortgage was givenby the husband only whereas the promissory note was signed by bothspouses. The note and the mortgage were two separate documents. Itis submitted that a better course would have been to dismiss the actionagainst the wife on the ground that she was not a party to the loan.Eventually the husband was found liable for the balance of the loan,although his liability was reduced due to the unreasonable sale of thetruck at a price below its market value.

243 [1975] 1 S.C.R. 512, 51 D.L.R. (3d) 559 (1974).244 8 A.R. 593. 82 D.L.R. (3d) 609 (S.C. 1978).

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