Forged Cheques, Mistake of Fact and Tracing:

B.M.P. Global Distribution Inc. v. Bank of Nova

Scotia
M.H. Ogilvie*

1. INTRODUCTION
Although the factual scenario in B.M.P. Global Distribution Inc. v. Bank of
Nova Scotia1 was strange,2 to say the least, and in the final analysis, opaque, the
case afforded the Supreme Court of Canada an opportunity to review a large number of legal rules relating to mistake of fact in payment and tracing of funds
through bank accounts, which rarely proceed to the top court. In the case, the core
issue was whether a drawee bank could claim restitution of funds paid on the basis
of a forged cheque from a payee who had already directed those funds to various
other accounts mostly under the control of the payee. The court concluded that the
drawee bank could succeed in recovery and on the way to that conclusion canvassed and clarified the law relating to mistake of fact in banking law, especially
the defences; the status of the Canadian Payment Association (CPA)3 clearing rules
vis-`a-vis bank customers; the nature of finality of payment in clearing; and the tracing of money which had become mixed with other account funds. The court addressed but declined to clarify authoritatively the meaning and scope of s. 165(3) of
*
1

Chancellors Professor and Professor of Law, Carleton University, Ottawa, and of the
Bars of Ontario and Nova Scotia.
2009 CarswellBC 809, 2009 CarswellBC 810, [2009] S.C.J. No. 15, [2009] A.C.S. No.
15, 2009 SCC 15, 304 D.L.R. (4th) 292, 386 N.R. 296, 94 B.C.L.R. (4th) 1, [2009] 8
W.W.R. 428, 452 W.A.C. 1, 58 B.L.R. (4th) 1, 268 B.C.A.C. 1 (S.C.C.) [BMP].
Ibid., at para. 93 (as characterized by Deschamps J.). See also B.M.P. Global
Distribution Inc. v. Bank of Nova Scotia, 2007 CarswellBC 155, 2007 BCCA 52,
[2007] 3 W.W.R. 649, 24 B.L.R. (4th) 201, 388 W.A.C. 252, 235 B.C.A.C. 252, 278
D.L.R. (4th) 501, 63 B.C.L.R. (4th) 214 (B.C. C.A.); leave to appeal allowed (2007),
2007 CarswellBC 2567, 2007 CarswellBC 2568, 262 B.C.A.C. 320 (note), 441 W.A.C.
320 (note), 379 N.R. 399 (note) (S.C.C.); leave to appeal allowed (2008), 2008 CarswellBC 478, 2008 CarswellBC 479, (sub nom. BMP Global Distribution Inc. v. Bank
of Nova Scotia) 269 B.C.A.C. 319 (note), (sub nom. BMP Global Distribution Inc. v.
Bank of Nova Scotia) 453 W.A.C. 319 (note), 385 N.R. 400 (note) (S.C.C.); reversed
2009 CarswellBC 809, 2009 CarswellBC 810, [2009] S.C.J. No. 15, [2009] A.C.S. No.
15, 2009 SCC 15, 304 D.L.R. (4th) 292, 386 N.R. 296, 94 B.C.L.R. (4th) 1, [2009] 8
W.W.R. 428, 452 W.A.C. 1, 58 B.L.R. (4th) 1, 268 B.C.A.C. 1 (S.C.C.) at para. 8 (as
characterized by Saunders J.A. in the British Columbia Court of Appeal).
The author is a director of the CPA, but the views expressed here are entirely the authors views alone and do not represent the views of the CPA.

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the Bills of Exchange Act (BEA);4 nor did it clarify entirely the question of whether
the standards set in the CPA rules could be implied by a court into a bank and
customer contract. These are all clearly important matters in banking law given the
difficulties posed by forged cheques and the court has usefully cut through and cast
aside some earlier legal ambiguities.

2. THE CASE
At the outset, it is important to note that the facts of the case as found by the
courts are riddled with missing information, so that there is an air of unreality about
them. Essentially, the owners of B.M.P. Global Distribution Inc, (BMP) a B.C.
company that distributed non-stick bakeware met in the U.S. with a man said to be
associated with a company, Sunrise Marketing, and agreed by telephone once they
had returned to Canada, that Sunrise would purchase the U.S. distribution rights to
the bakeware for $US1.2 M, a number pulled out of the air. BMP knew nothing
about Sunrise and the agreement was never reduced to writing. On 22 October,
BMP received by courier a cheque for $CDN904,563 in an envelope without a
cover letter but with a name and address on the envelope unknown to BMP. The
cheque was drawn on an account of a corporation called First National Finance
Corporation (First) at a Toronto branch of Royal Bank of Canada (RBC). BMP
deposited the cheque in its Burnaby branch account of Bank of Nova Scotia (BNS)
and the bank told BMP that the funds would be held until the genuineness of the
instrument was confirmed. The previous account balance was $59.67. BNS confirmed that First had sufficient funds with RBC and in due course received the
funds and released the hold on 30 October. Over the next 10 days, BMP made a
number of transfers out of the account including $US20,000 to a Citibank account
in New York payable to persons unknown to the principals of BMP; transfers to the
personal accounts of the BMP principals; transfers to an account opened on 2 November for a numbered company wholly owned by one of the principals (a certified
cheque for $100,000 and a cheque for $300,000); as well as a certified cheque for
$300,000 deposited in a BMP account at BNS after being taken to the Bank of
Montreal which issued a draft for $300,100 which was returned for deposit at BNS.
There was no explanation for this transaction, and the various other accounts into
which funds were transferred had balances prior to the transfers of variously
$45.87, $74.35 and $236.29. Some of the funds transferred were used to make
purchases, pay debts and fund travelling expenses. No reasons were offered or
found for these transactions.
On 9 November, RBC notified BNS that the cheque was counterfeit because
the drawers signature had been forged. BNS froze the accounts and asked BMP to
assist in recovery of the cheque proceeds. On 6 December, RBC and BNS entered
an agreement in which RBC warranted that the cheque was forged and BNS agreed
to transfer all funds it could to RBC which would indemnify BNS for any BNS
losses. BNS transferred $777,336.04 to RBC. BMP, its principals and the numbered company sued for breach of contract, negligence, money had and received,
breach of fiduciary duty and breach of the CPA clearing rules, and claimed substantial, aggravated and punitive damages. The core argument put forward by BMP

R.S.C. 1985, c. B-4.

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was that BNS was in breach of the account contract because it had charged back the
funds after the provisional credit had been finalized pursuant to the CPA clearing
rules.
The trial judge had accepted this argument, albeit reluctantly, and did not address issues of mistaken payment or tracing, awarding in damages the sum of all
the chargebacks. However, the B.C. Court of Appeal reversed this decision. Writing for a unanimous court, Saunders J.A. framed the issue as one of fraud which
BMP was asking the court to sustain and complete. She agreed with the trial judge
that BNSs reversal of the credits was a breach of contract but thought the legal
issues to be more complex because the contract breach was within a larger matrix
of facts including the interpolation of RBC by the unknown fraudster into the
scheme in order to use the clearing rules to disguise and perpetrate the scheme, as
well as the use of an innocent party, BMP. Instead, her analysis began with s. 48(1)
of the BEA, by virtue of which the forged cheque was wholly inoperative, so that
BMPs position was founded on nothing and it lost nothing in the scheme since it
provided no consideration for the cheque. Saunders J.A. thought it would be inconsistent with good conscience and equity to permit BMP to gain a windfall and
awarded $1 in nominal damages for the breach of contract together with $100.00
for the amount originally added to the $300,000 draft issued by the Bank of Montreal. She further found BNS entitled to trace the funds into the various accounts
into which they had been transferred and denied punitive damages.
BMP appealed to restore the original award of damages on the simple ground
of its lost contractual right to demand repayment of the funds in the account as well
as for punitive damages. BNS relied on the invalidity of the cheque to argue that
BMP had no interest in the proceeds of the cheque and therefore had no entitlement
to damages. BNS also argued that it could trace the funds since they were clearly
identifiable. Speaking for a unanimous court, Deschamps J. characterized the case
as hinging on whether the drawee bank RBC, which was not a party to the proceedings, could rely upon a mistake of fact to claim restitution and the right to trace the
funds. By characterizing the case in this way, the court moved away from the narrow question of breach of bank and customer contract which the lower courts had
resolved in BMPs favour to focus on the fraud which initiated the factual scenario
of the case.
First, the court addressed the right of the drawee bank to recover funds paid
under a mistake of fact and expressly adopted the approach in Barclays Bank Ltd.
v. W.J. Simms Son & Cooke (Southern) Ltd.5 as the correct approach, overtaking
the older Canadian authority, Royal Bank v. R.,6 on the matter. The court appeared
to be attracted by the apparently straightforward nature7 of the two-part Simms test:
(i) a person who pays another money under a mistake of face is prima facie entitled
to recover the money; but (ii) the claim may fail where (a) the payer intends the
payee to have the money regardless of the truth or falsity of the fact, (b) the pay-

5
6
7

[1979] 3 All E.R. 522, [1980] 1 Q.B. 677 (Eng. Q.B.) [Simms].
1931 CarswellMan 20, [1931] 1 W.W.R. 709, [1931] 2 D.L.R. 685 (Man. K.B.) [The
King].
Supra, n. 1 at para. 22.

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ment is made for good consideration such as discharging a debt owed to the payee,
or (c) the payee has changed his position in good faith.8
By application of s. 48(1) of the BEA, the court quickly concluded that RBC
had a prima facie right to recover since the forged cheque was wholly inoperative
and RBC mistakenly paid the cheque before it knew that it was forged. The second
step of the Simms test was more complex, however, and involved the court in a
somewhat circuitous tour through the Anglo-Canadian law of mistake of fact in
which there had been some unresolved issues prior to the case.
The first exception, of situations where the payer intends the payee to keep the
funds despite the mistake involved, in the courts view, the nature of finality of
payment, ss. 128(a) and 165(3) of the BEA, the account agreement, and the CPA
clearing rules. Deschamps J. began her analysis of this exception with the observation that a drawee bank paying out funds on the basis of a forged cheque will usually not intend the payee to keep the funds since the drawee will be liable in breach
of contract with its customer for paying without authority to refund the customer
and therefore bear the loss. BMP countered that position with three arguments: (i)
finality of payment at common law prevents the drawee bank from recovering the
proceeds of a forged cheque from anyone other than the forger; (ii) the scheme of
the BEA precludes RBC recovery from BNS or BMP; and (iii) the account agreement between BNS and BMP precludes BNS recovery from BMP.
The first argument was based on two older cases, Price v. Neal9 and R. v.
Bank of Montreal,10 which have both been subject to multiple interpretations over
the years. The court canvassed these interpretations11 and then cast the cases aside
in favour of the principle that the principle of finality of payment serves as a general goal of the common law but cannot negate legal rights which might otherwise
accrue to a drawee nor can it be used as an indiscriminate bar to recovery of a
mistaken payment.12 Although the cases were not overruled expressly, they have
been so neutered as to amount to overturning the principle of finality of payment in
appropriate circumstances; in other words, the principle no longer stands in the
common law at least in relation to forged cheques to protect the payee from making
restitution to the drawee bank.
The second argument in relation to whether or not the drawee bank intended
BMP to keep the funds was based on the application of sections 128(a) and 165(3)
to the facts insofar as BNS was BMPs agent for the purpose of collection of the
cheque and may have a special status as a bank in receipt of an unendorsed cheque,
as a holder in due course. However, the court decided that it did not have to deal
with the issue of whether BMP became a holder in due course under s. 128(a) because it failed to meet the requirements under s. 55(1)(b) of taking the instrument
for value. The court also found that the s. 165(3) argument failed because although
the section affords protection to a collecting bank, it is not obliged by the section to
rely on the section when restitution is claimed. Nor can a payee use this statutory

8
9
10
11
12

Supra, n. 5 at 535 (per Goff J.).

(1762), 97 E.R. 871, 3 Burr. 1354 (Eng. K.B.) [Neal].
(1907), 1907 CarswellOnt 780, 38 S.C.R. 258 (S.C.C.).
Supra, n. 1 at paras. 2934.
Ibid., at para. 35.

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shield for a bank as a sword against it. Section 165(3) does not exist to permit a
payee to rely on it to create an entitlement to a forged cheque regardless of the
validity of the signatures on that cheque.13
The third argument was that the account agreement did not permit BNS to
return the funds to RBC. This argument involved two sub-arguments relating to the
express terms of the agreement and the possible implication of the CPA clearing
rules. The argument in relation to the express terms which clearly permitted the
reversal of funds credited to an account which are not settled for any reason including fraud (clause 4.7) was that the term only applied to provisional credits; however
Deschamps J. found that the term was not so limited on its express provisions.
Moreover, she found that the doctrine of mistake of fact also operated as an implied
term of the contract to permit BNS to return the funds where payment has been
made by mistake, even where the funds had been finally credited to the account.
Clause 17.3 of the account agreement preserved all BNSs rights at law.14 The argument in relation to the CPA clearing rules was that the time limits within the
rules for returns outside the clearing could be incorporated into the bank and customer agreement as an implied term so as to preclude BNS from returning the
funds to RBC. Again, Deschamps J. declined to accept that argument and restricted
the application of the clearing rules to members of the CPA. Moreover, she found
support for this position in the account agreement, although conceded that clause
4.4 of the agreement was somewhat ambiguous as to whether it applied to reversed
final credits in an account.15 She did not, however, consider the cases in which
the courts have used the time limits in the CPA rules as an appropriate analogy visa` -vis a customer so as to leave the bank with any indebtedness resulting from the
enforcement of such an implied term.16
Turning to the second exception in the second part of the Simms test, the court
quickly concluded that BMP had given no consideration for the cheque. The third
exception of change of position was also rejected both in respect to BMP and BNS.
At the time the funds were frozen, they remained credited to BMPs account so that
neither holder nor payee had changed its position.17 Thus, the conditions for recovery by the drawee under Simms had been met: the payment was made under a mistake of fact and the payee has no defences of intention to pay, consideration or
change of position.
The court then turned to three other arguments made by BMP to the effect that
it was wrong for BNS to return the funds to RBC. The first argument, a jus tertii
argument that BNS had favoured another bank over BMP, was quickly dismissed
since RBC had a legal right to restitution of money paid under mistake of fact.18
Nor was BNS under any duty to give preference to BMP since this case clearly

13
14
15
16
17
18

Ibid., at para. 45.

Ibid., at paras. 5053.
Ibid., at paras. 5460.
See section 3 below.
Supra, n. 1 at paras. 6265.
Ibid., at para. 67.

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involved fraud and the funds should be returned to their rightful owner. Thus, the
second argument of public policy and the third argument of self-help also failed.19
Having established that the drawee bank had a right to restitution of the funds
as paid under a mistake of fact, Deschamps J. then turned to the question of
whether the funds could be traced. She defined tracing as an identification process
whereby the claimant must show that the assets sought are either the very assets in
which the claimant asserts a proprietary right or a substitute for them.20 There was
no issue of identification here since the funds BNS received as BMPs agent already came from RBC and had to be returned. However, the court thought that the
funds transferred to the various accounts should be subject to separate consideration because BNS was not acting as agent of the holders of those accounts.21 Accordingly, the court reviewed the law of tracing.
The court accepted the authority of Agip (Africa) Ltd. v. Jackson22 and of
Citadel General Assurance Co. v. Lloyds Bank Canada.23 Following Agip, the
court stated that liability in tracing is based on mere receipt of funds and the extent
of that liability is the amount received. The court then addressed the alleged position that at common law funds cannot be traced to bank accounts and concluded
that tracing in bank accounts is possible as long as identification is possible. Tracing is not precluded by the facts that the funds have gone through a clearing system
or are mixed with other funds in an account.24 The rules for tracing funds at common law are the same as those for tracing physical mixtures.25 Identification of
the funds in the various accounts is easy and tracing possible.26 BMP argued that
certification of a cheque would be a bar to tracing but the court declined to accept
that argument because certification does not affect the nature of the funds which
may still be traced notwithstanding the irrevocability of certification itself.27 In
coming to this conclusion, the court appeared to approve the position taken in earlier cases by the Ontario Court of Appeal that certification is tantamount to accept-

19
20
21

22
23

24
25
26

27

Ibid., at paras. 6874.

Ibid., at para. 75.
Ibid., at para. 77. Surely this position is incorrect since the bank is as much an agent for
one account as for any other account in its possession [NTD: the argument appears to
be more appropriate for the body of the article, rather than the footnote].
(1990), [1992] 4 All E.R. 451, [1991] 3 W.L.R. 116 (Eng. C.A.) [Agip].
35 B.L.R. (2d) 153, 47 C.C.L.I. (2d) 153, 219 N.R. 323, (sub nom. Citadel General
Life Assurance Co. v. Lloyds Bank Canada) 156 W.A.C. 321, (sub nom. Citadel
General Life Assurance Co. v. Lloyds Bank Canada) 206 A.R. 321, 19 E.T.R. (2d) 93,
[1999] 4 W.W.R. 135, 66 Alta. L.R. (3d) 241, [1997] S.C.J. No. 92, [1997] 3 S.C.R.
805, 1997 CarswellAlta 824, 1997 CarswellAlta 823, 152 D.L.R. (4th) 411 (S.C.C.).
Supra, n. 1 at paras. 79-80.
Ibid., at para. 85.
In its somewhat prolix analysis of this matter at supra, n. 1 at paras. 7886, the court
also relied on Taylor v. Plumer (1815), 3 M. & S. 562, 34 E.R. 721; Banque Belge pour
lEtranger v. Hambrouck, [1920] 1 K.B. 321 (C.A.); and Foskett v. McKeown (2000),
[2001] 1 A.C. 102, [2000] 3 All E.R. 97 (U.K. H.L.).
Supra, n. 1 at paras. 87-88.

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ance and is irrevocable,28 although not necessarily insulated from a subsequent

claim in restitution as is the case here.29
The court dismissed the claim for punitive damages and awarded nominal
damages to BMP of $1 because BNS breached the account agreement by reversing
the credit in BMPs account without instruction by BMP together with the $100
difference between a bank draft and a certified cheque.

3. DISCUSSION
In BMP, the Supreme Court of Canada obviously canvassed a large number of
issues and clarified the applicable law in relation to several of them, in particular,
the test for mistake of fact in restitution in banking law and the application of tracing through bank accounts at common law. Several issues remain unresolved, such
as a thorough exploration of BEA, s. 165(3), and others remain doubtfully resolved
such as the appropriateness of using the CPA clearing rules as analogies for implication as terms into the bank and customer account agreement, regardless of the
banks obligations under the rules as a CPA member within the context of the rules.
Before examining these issues more closely, it is important to observe at the outset
the orientation to the facts of the case adopted by the court since that position predicted the outcomes on each of the individual legal issues in the case.
Following the lead from the B.C. Court of Appeal, Deschamps J. began with
the fact that a forged cheque was at the root of the case. She agreed with the trial
finding that BNS had breached the account agreement by reversing a final credit in
an account and awarded nominal damages, but moved beyond that narrow issue to
the entire context and the initial forged cheque. This provided the moral orientation
of the decision and the dilemma of deciding which innocent party should bear the
loss, if any, resulting from the conduct of persons unknown: RBC which did not
detect the forgery until presumably the cheque was cleared to the branch on which
it was drawn; BNS which relied entirely on RBC prior to making the provisional
credit final; or BMP whose role was assumed to be that of an innocent dupe, although doubts about that characterization remain. At the outset, it is also important
to make an observation which the court did not make about the nature of clearing
insofar as cheques are normally honoured where there are funds available in the
account on which they are drawn when initially cleared, although physical presentment may be delayed by some weeks at which time a forgery or some other irregularity may be detected. This likely explains RBCs delay in detecting the forgery
and taking steps to secure the return of the funds. If final clearing were to be
delayed until physical presentment,30 cheque holds would be much longer and
commercial transactions would become considerably slower as a result. The possibility that a drawee bank might want to retract funds paid on a cheque subsequently

28

29
30

A.E. LePage Real Estate Services Ltd. v. Rattray Publications Ltd. (1994), 21 O.R. (3d)
164, [1994] O.J. No. 2950, 1994 CarswellOnt 1206, 120 D.L.R. (4th) 499, (sub nom.
LePage (A.E.) Investments Ltd. v. Canadian Imperial Bank of Commerce) 77 O.A.C.
280 (Ont. C.A.); Centrac Inc. v. Canadian Imperial Bank of Commerce (1994), 1994
CarswellOnt 1205, 77 O.A.C. 290, 120 D.L.R. (4th) 765, 21 O.R. (3d) 161 (Ont. C.A.).
Supra, n. 1 at para. 87.
BEA, s. 84.

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found to be forged or invalid is the price paid for the quick process of the vast
majority of transactions without issue. The cheque in BMP is the unusual one that
has to be unwound on the ground of forgery. To ensure that legal transactions proceed in a timely fashion, it is necessary to have legal rules to permit clearings to be
unwound when forged or invalid cheques are unknowingly cleared, otherwise bad
cheques would likely increase in number and the banking system be undermined by
dishonesty. Electronic cheque presentment would obviate some of these problems.
By confirming that a drawee bank can successfully rely on mistake of fact in
restitution, the Supreme Court affirmed the importance of honesty within the banking system. Moreover, confirmation that Simms is the appropriate test further affirms this orientation in banking law because Simms is essentially a simple,
straightforward test to state: once proven, mistakes can be unwound unless there is
some overriding equitable reason for not doing so such as an intention to pay, good
consideration for the payment, or detrimental reliance by an innocent party. The
adoption of Simms renders irrelevant and obsolete the problems lurking in the earlier case, The King, of requiring the recipient of the funds to be in some way a party
to the mistake, even by resorting to legal fictions as occurred in that case.31 That
requirement made recovery difficult because by merely receiving funds and refusing to repay them, the recipient could be said to be a party to the mistake with the
result that recovery would be unlikely and the doctrine of mistake of fact largely
irrelevant. The other problematical aspect of the earlier case law overtaken by
Simms was that it also required the payer to believe that he was liable to make a
payment. This requirement made reversal of gifts problematical, but in view of the
fact that a mistaken belief about liability to pay is as much a mistake of fact as any
other, it is difficult to see what was added by this requirement. However, with the
adoption of Simms as the appropriate test, requiring simple mistake of fact on the
part of the payer, mistake alone as a basis for restitution is more clearly established
in the law. The state of mind of the recipient is now completely irrelevant. In any
case, had the recipient also known of the mistake, the case for restitution could,
paradoxically, be even stronger. The burden of proving mistake remains with the
payer, but that is a factual burden of proof like any other in the law and dependent
on the trial judges assessment of credibility.
The more difficult aspect of mistake of fact in restitution after the adoption of
Simms is balancing the defences available to the payee against the payers prima
facie entitlement to recovery once the mistake is proven. Prior to Simms, the payee
had available the defence of estoppel which was problematical because he had to
show that the payer had made a representation of fact on which the payee relied or
that the payment was more in breach of a duty owed to the payee. A mistaken
payment could not be said to amount to a representation and the payer could rarely
have been in breach of a duty. After Simms, a mistaken payment alone suffices for

31

For a detailed analysis of these earlier problems and the law see Peter D. Maddaugh &
John D. McCamus, The Law of Restitution, 2nd ed. (Toronto: Canada Law Book, 2004)
[Maddaugh & McCamus, Law of Restitution] at 277290 and Goff of Chieveley,
Lord, & Gareth Jones, The Law of Restitution, 6th ed. (London: Sweet & Maxwell,
2002) at 181205.

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a payee to rely on one of the three defences set out in Simms, so again the law has
been simplified in its application.
On the facts, the finding in BMP with respect to two of the three defences,
good consideration and change of position, were self-evident: BMP was simply the
recipient of the funds and had given no consideration in exchange nor was any
existing indebtedness discharged by the payment, and the funds largely remained in
the various accounts with no other transactions entered into in reliance. The third
exception was also, on the facts, straightforward since it was clear that RBC did not
intend to pay BMP once it learned of the forgery and even if it did, did not intend
BMP to retain the funds. However, the rather specious arguments dredged up by
counsel for BMP, although rightly dismissed as baseless by the court, provided the
court with an opportunity to consider other banking law issues, some for the first
time.
The first issue of whether a drawee bank can successfully seek recourse from
the payee of a forged cheque had previously been answered in the negative on the
basis of Neal and Bank of Montreal v. King. While the English courts32 had already
upheld the right of the drawee bank to do so, there was no Canadian authority to
that effect, rather the principle of finality of payment was thought to apply.33 BMP
is now that authority, notwithstanding previous academic support for Price and finality of payment on the grounds that there should be avoidance of unravelling a
series of transactions because this could prove burdensome and that a bank is in the
best position to bear the loss and spread it through its customer network.34 Admittedly, BMP was easy to unwind and in the absence of a change of position there
was no complex Simms balance to adjudicate, but arguably the outcome is the better one to ensure honesty in commercial transactions: honesty should trump finality
of payment in every fact situation in which it is possible to unwind transactions. As
noted earlier, Price and Bank of Montreal were not expressly overruled in BMP,
but their application in banking law is now subject to a huge exception where the
drawee wishes to unwind a forged cheque and the funds are readily traceable.
The second issue relates to the meaning and scope of s. 165(3) of the BEA.
While a comprehensive exploration of this controversial matter was not undertaken
by the court, one advance was made in relation to whether s. 165(3) could be used
by a payee to resist the unwinding of transactions set in motion by a forged cheque.
The court not only found that the payee could not so rely but further found that a
collecting bank could waive the section when restitution of funds arising from a
forged cheque was at issue. This position strengthens the view that s. 165(3) exists
for the protection of a collecting bank, although on the facts, the court was not
obliged to speculate further about other situations in which a collecting bank might
wish to rely on the section.
The third issue arises from the courts approach to the interpretation of the
account agreement. The account contract in question was a plain language contract
but the language of the contract was less than plain. A good example was the use of

32
33
34

National Westminster Bank Ltd. v. Barclays Bank Intl Ltd., [1975] 1 Q.B. 654.
Maddaugh & McCamus, Law of Restitution, supra, n. 31 at 332338.
Ibid., at 338; and Benjamin Geva, Reflections on the Need to Revise the Bills of Exchange Act in Some Doctrinal Aspects (1981-82) 6 C.B.L.J. 269 at 312316.

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the word charge in clause 4.735 on which BNS relied which was interpreted by
the court to mean both to credit and debit funds from an account. While charge
and charge back are colloquially used by bankers, the dual use of charge in
clause 4.7 creates ambiguity in the clause which the court interpreted purposively
in the banks favour, rather than contra proferentem against the bank. While the
outcome of the courts approach was probably correct within the larger matrix of
facts, the slide away from strict construction and contra proferentem is somewhat
troubling given the nature of bank account agreement as contracts of adhesion par
excellence. The court also took a less strict approach to the phrase credited to your
account in clause 4.7 to mean both provisional and final credits, when again, the
contract was arguably ambiguous. It is to be hoped that in future cases in which a
forged cheque is not at the root of the facts, the court will return to strict construction in the interests of the party with less bargaining power in negotiating account
agreements. It is equally to be hoped that the banks will use precise legal terminology in plain language contracts where colloquial language can be a source of ambiguity for customers and courts.
The court also considered the implication of two terms into the account agreement and decided to imply a term that a mistake of fact would justify BNS in reversing the credits but declined to imply a term drawn by analogy with the CPA
clearing rules that would limit the period of time within which it could do so. The
former implication is, obviously, within the power of a court provided there are no
express contractual terms to the contrary and no illegality tainting the implied term.
On the assumption that there was no express term to the contrary (not having access to the entire contract at issue), there can be no criticism of an implied term
replicating a common law principle. However, the question of whether a CPA
clearing rule can be used as an analogy for implication into the bank and customer
contract requires further consideration.
The court adopted the position taken by Evans J.A. in National Bank of
Greece (Canada) v. Bank of Montreal36 that the clearing rules are binding only on
CPA members, as indeed they are. But there are also appellate decisions which
have drawn analogies from the rules for implication into the bank and customer
contract and none of these cases were cited or discussed by the court.37 The argument in BMP was not that the rules also govern bank customer as if they were CPA
members, because clearly they do not, but that the rules can be considered as approximates for the amount of time within which a provisional credit can be expected to be finally cleared within the clearing rules and finally credited to a customers account. Thus, as between bank and customer only, their implication into

35
36

37

See supra, n. 1 at para. 49 for text of the entire clause 4.7 of the account contract
between BNS and BMP.
(2000), 266 N.R. 361, [2001] 2 F.C. 288, 2000 CarswellNat 3495, [2000] F.C.J. No.
2105, 2000 CarswellNat 3127, 196 F.T.R. 320 (note), 30 Admin. L.R. (3d) 147 (Fed.
C.A.) at para. 19, cited in supra, n. 1 at para. 57.
Stanley Works of Canada Ltd. c. Banque canadienne nationale (1981), [1982] R.L.
433, 20 B.L.R. 282, 1981 CarswellQue 31 (Que. C.A.) started this line of thinking. For
analysis of the subsequent controversy see M.H. Ogilvie, Bank and Customer Law in
Canada (Toronto: Irwin Law, 2007) at 260262.

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555

an account contract by a court could give a customer comfort that the funds are
available for the customers use in most circumstances, with forged instruments as
in BMP being an exceptional and overriding situation. In the vast majority of transactions, there is no harm to either bank or customer by such implication, nor, as
BMP shows would such an implied term preclude the unwinding of transactions
founded on forged or invalid instruments or where there is some other underlying
illegality. It would protect customers where banks are acting in a dilatory fashion
for no good legal reason, for example, where a customer has a good equitable defence as sustained in BMP, especially a detrimental reliance defence in cases of
contract breach rather than mistake of fact in restitution. In BMP, the court elided
the multilateral contract among CPA members bound by the clearing rules with the
bank and customer contract without good reason. They are distinct, but their distinctive legal natures do not preclude one contract from being mined by another for
implied terms by a court. In any case, implying a term about finality into the BNSBMP account agreement would not have affected the final outcome in the case
since the court could still have found the underlying forgery a good reason to unwind the credit: illegality still trumps contracts.
The fourth and final issue of note in the Supreme Court decision in BMP was
the courts acceptance that common law tracing can occur in relation to any funds
as long as they can be identified even into mixed fund bank accounts where the
funds have been through the clearing system. This outcome brings the law into line
with both common sense and numerous well-regarded academic writers,38 and is a
welcome clarification in the law. With electronic banking, it was an idea whose
time has now come. The difficult part is, of course, the actual identification and
tracing process itself, especially where the funds may have changed identity into
and out of chattels, and BMP, on its facts, could provide no assistance in that regard. Tracing was a simple matter in BMP but by establishing the right to trace into
bank accounts at common law, the court has put the law of tracing on a firm
foundation.

4. CONCLUSION
Once the Supreme Court of Canada decided that the rule for finality of payment did not apply where the underlying transaction was a forged cheque, the other
legal issues in BMP fell into place. Illegality trumps other legal rules, whether statutory or contractual in origin. With the exception of the earlier noted problems in
its analysis of the contractual issues, BMP should be welcomed by both banks and
customers because it confirms that dishonesty will not be condoned and that the
courts will unwind, if at all possible, transactions dishonest at their inception. Yet,
BMP remains a strange case. It remains unclear why BMP challenged the drawee
banks attempt to secure restitution of the funds in the first place since it seemed to
permit itself to be used in a fraudulent scheme. It remains unclear why the trial
judge did not put an end to the litigation by finding that fraud was at the root of the
case. However, the positive outcomes in relation to the adoption of Simms and Agip

38

See Maddaugh & McCamus, Law of Restitution, supra, n. 31 at [ch. 6 NTD: need
page reference or range]; and Lionel D. Smith, The Law of Tracing (Oxford: Clarendon
Press, 1997).

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are welcome and much older case law of doubtful utility has been cleared away as a
result.

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.