Legal Blog

Check

A customer sets up systems so that, to be valid, every cheque requires the signatures of two specified signing officers. The customer ensures that it signs a banking resolution to this effect and supplies its bank with that resolution. The customer then knows that if the bank clears cheques signed by someone other than both of the two authorised signatories, the customer will not be liable for those unauthorised cheques. Bad assumption! A number of cases have dealt with this proposition; Manor Windsor Realty Ltd. v. The Bank of Nova Scotia 2011 CarswellOnt 7227, (Ont. S.C.J.), is the most recent.

 Fraud

 The customer was a real estate brokerage corporation. However, it was a two-man show so I will refer to the two owners as partners and flip between single and plural when referencing the customer and its owners.

 The customer had a great bookkeeper. She was with them for 15 years and did everything for them: posted all entries, produced the cheques for signature, and balanced and reconciled the bank accounts. She also stole $400,000 from them.

 The customer also had a great security system. The two partners were the signing officers for cheques; both had to sign, presumably because they did not trust each other. One of them, however, was involved in sales and was not around the office all that much. So, for convenience, he signed the cheques in blank and gave them to his partner. So much for the sole reason for both partners signing cheques. The other partner, who was in charge of reviewing invoices and authorising payment, kept the cheques locked in his drawer. Only he and his partner had a key – oh yes, and the bookkeeper.

 It seems that the bookkeeper had a gambling problem and, for over 5 years, treated the customer’s bank account as her own personal piggybank. She would enter a payee on the accounting program, usually another real estate brokerage; change the payee to herself for purposes of printing the cheque; and then use a pre-signed cheque, which she took from the locked drawer. This, by the way, is a snap to do in PCLaw. She never obtained the second signature on her purloined cheques and the bank, as all banks do, never checked to ensure that the cheques were signed according to the cheque signing authority. Under the Canadian banking system, Mickey Mouse could sign a cheque and it would clear.

 Of course, the customer caught the fraud when they reconciled their bank accounts. Sorry. We forgot. They did not reconcile their bank account statements, or even check their statements, other than to see what was in the bank. They left all of that tiresome business to their trusted bookkeeper.

 The customer caught the fraud, years later, when the bookkeeper told one of the partners that there was an overdraft of $75,000 in the general account at a time when he thought it would be $25,000. When he did a cursory check of the statements and cheques, the one-signature cheques leaped out at him and the game was up for the bookkeeper.

 Agreement

 When the partners commenced their relationship with the bank, they signed a number of documents, including the document that concerned them the most, the line of credit agreement. They paid little attention to the financial services agreement (FSA). That agreement, which we suspect all financial institutions use, stipulated that the customer had a duty to “maintain systems, procedures and controls to prevent and detect: … forged, fraudulent, and unauthorised instructions…” The FSA also imposed a duty on the customer to “review each statement carefully to check and verify the entries. If you believe that there are any errors or omission, you must tell us in writing within 30 days…. If you don’t tell us …, you have acknowledged that:” in essence, everything is correct. The FSA went on to say, “After the 30 days, you cannot claim, for any purpose, that any entry on your statement is incorrect and will have no claim against us for reimbursement relating to any entry, even if the instruction charged to your account was forged, unauthorized or fraudulent.”

 Like most bank users, the partners never read the agreement or, if they did, could not recall what it said as they went about their day-to-day business.

 However, the FSA was brought to their attention when they claimed against the bank for their losses. The bank readily admitted that it negligently cleared the fraudulent cheques for the last statement before which the customer notified it of the problem. This resulted in the bank being responsible to pay the whopping sum of $7,809.22.

 Issue

 The customer was not happy with the bank’s response. First, it claimed that the FSA was ambiguous and, therefore, because the bank drafted it, it should not bind the customer. We will not bore you with the judge’s interpretation of the clauses, but the judge was quite satisfied that there was no ambiguity and that 30 days meant 30 days, regardless of the bank’s negligence.

 The customer then claimed non est factum. Two real estate brokers dealing with contracts for large sums of money day-in and day-out claimed that they never really understood the contract. That defence was dead in the water from the start. It did not pass the “giggle factor.” The customers did not read the FSA before they signed it. “Nothing prevented them from doing so; they simply chose not to.” The law has been settled for ages that people who would easily understand an agreement if they bothered to read it and who fail to do so when given sufficient opportunity, cannot later claim they did not understand what they agreed to do.

 Consequently, the judge dismissed the customer’s action in excess of the amount that the bank admitted it was liable to pay.

 Moral

It seems that the customer was a slow learner. Even after the customer discovered the fraud and sacked the bookkeeper, the customer did not change its slapdash ways. One partner continued to sign cheques in blank, the other partner continued to hold these cheques in a locked drawer – to which only the two partners have keys. Of course, it would be unknown for someone to pick a lock on a desk drawer.

 We have some comments arising from the facts of this case:

 1.   What is the point of having two signatories to a cheque if one of them signs the cheques in blank? Would it not be safer for each to be allowed to sign a cheque? Signing a cheque in blank is an invitation to disaster. If either partner, acting alone, could have signed a cheque, then the bookkeeper would have had to either dupe one of the partners to sign (and this would not be likely if the cheques were made payable to her) or forge one of their signatures. That would have been more difficult to accomplish than the scheme she used.

 2.   It is extremely dangerous to have no checks and balances in a financial system. One person can write the cheques and post the entries, even reconcile the bank accounts. Another person should check those reconciliations.

 3.   How many of our readers can say that they check the work of their bookkeepers. We suspect that the percentage is not high. Since all of you signed an FSA, equivalent to the one referenced in the case, the bank will not protect you against fraud; you have to protect yourself.