The Ontario Court of Appeal released a decision that should be of interest to you if you accept cheques – and what small business doesn’t?
That the defendant did not suspect fraud is a shame because it was a fairly classic version. The appellant agreed to facilitate a transfer of funds on behalf of a Taiwanese businessman whom he did not know in return for a 5% commission on the transfer. In accordance with this arrangement, the appellant received a cheque payable to him for $57,000.13 in March 2005. He deposited $2,850 (representing his commission) into an existing account at the respondent credit union and the remaining $54,150.13 into another account he had just opened with the respondent. As per the instructions he received from the Taiwanese businessman, the appellant ordered a wire transfer of $41,989.14 US to a company in Tokyo. In fact, the cheque was doctored. The cheque was ”washed” – that is, the cheque was originally payable to one person for only a few hundred dollars but the payee and the amount were then changed to the Taiwanese business man for $57,000.13. The alteration was discovered and the cheque was returned as dishonoured on June 9, 2005. The respondent reimbursed the Royal Bank of Canada (the drawee bank) and then charged the amount back to the appellant. The respondent seized $12,658.03 from the appellant’s accounts and brought an action against him for the balance of $44,342.10. The appellant counterclaimed in negligence and breach of contract. In his pleadings and during trial, the appellant argued that he was a victim of fraud who did not know that the cheque had been altered and so he should not be liable for the loss.
The issue in the case was when can a bank “charge back” a cheque. In this case, the appellant received the cheque for $57,000.13. He deposited all of these monies into his bank account – so he was given a credit for this by his credit union – and he then kept some of the funds and he sent the rest via wire transfer. The end result was that the credit union gave him funds worth $57,000.13 on the basis of what turned out to be a bogus cheque. The credit union then “charged back” the amount against the man’s accounts. The Court noted that while many financial institutions expressly set out in their account opening forms that they have this right to charge back, this right exists even if there is nothing in the account opening forms (as was the case for this credit union). So, you should realize that if you have problems with cheques, and even if the agreements with the financial institution are silent, you can have any amounts credited to your account charged back.
Another issue raised was that the credit union should not have effected the charge back because too much time had passed – the cheque was deposited in March 2005 but wasn’t dishonoured until June 9, 2005. On this issue, the Court accepted the following statement: “There would appear to be no limitation on the time period within which a charge-back can be made, but it should probably be within a reasonable period of time as a matter of equity to the customer in knowing the state of the account.”
The final issue addressed by the Court was the argument that the credit union should have warned the appellant of the possibility that there could be a later reversal of the credit and that the credit union failed to discover the alteration to the cheque. In this regard, the Court held that the credit union had no duty to warn the appellant. There was no obligation to guarantee the validity of the cheque and there was no reason to know that the cheque would be later dishonoured.
The end result of this case is that you have to be careful when taking cheques nowadays. Moreover, if you end up being a victim of fraud – unless it is blatantly obvious that the cheque has been tampered with – then you are liable to have this affect only yourself and you will not be able to put any blame on your bank. In this case, the appellant had the credit union call the other bank to confirm that there were sufficient funds. It may have helped if the appellant took the extra step of having the cheque certified. It would have definitely helped if the appellant had called the party that issued the cheque to confirm that it was legitimate. In this latter regard, lawyers tend to do this all the time. Why? Because it is not uncommon for someone to send us a cheque on a “transaction” that is really just a scam and have this money laundered through our trust accounts. To counteract this activity, we make phone calls to ensure that the cheques are legitimate. A small annoyance to have to take this step – but it is definitely worth it if you can avoid a huge annoyance later if the cheque is bad in some way.
Something to think about.