Archive for July, 2011

Victim of Fraud – Bad Cheque

Wednesday, July 13th, 2011

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.



Dealing with a Foreign Country

Sunday, July 10th, 2011

There was an interesting decision from the Supreme Court this past week. It dealt with a woman who worked for the Moroccan government in their embassy. When she was relieved of her duties she sued for wrongful dismissal. In the Quebec Superior Court she was successful but she lost in the Quebec Court of Appeal.

The Supreme Court last week rejected her application for leave to appeal. While the decision of the Supreme Court basically says nothing, it is interesting to look at the Quebec Court of Appeal’s decision. This is because the entire case revolves around whether the lady was able to sue in the first place. The Quebec Court of Appeal found that she was not able to do so because of a federal law called the State Immunity Act. Put simply, the Act says that foreign countries cannot be sued in Canada unless they are carrying on a “commercial activity” in Canada.

For the Quebec Court of Appeal, the lady’s activities for the Moroccan embassy and its Montreal consulate were not “commercial activities”. As stated by the Court at paragraph 79 (with my far from perfect translation):

In summary, it is difficult to see how the bonds of employment between the government of Morocco and one of its [civil] servants working at its Canadian embassy or at its Montreal consulate can take on a “commercial” character. Its employment relationship with Ms. El Ansari is clearly an internally regulated problem and should remain as such. Despite all of the sympathy that one could have for the situation of the employee and the treatment that she claims to have suffered, the Canadian courts must abstain from intervening, because to do otherwise would infringe upon the sovereignty of the Moroccan government

Now, if you are supplying materials to a foreign government, you have nothing to be worried about since that will clearly be a “commercial activity” and you will be entitled to sue. But what happens if, for example, you are dealing with a foreign company and things do not work out for whatever reason. Suppose that the country has something like our Export Development Canada and they post on a web site that other companies in the country shouldn’t do business with you because your company is no good and this causes damage to your company. Or, suppose that you have agreed to provide services to a foreign country’s government but you have agreed to work as an independent contractor and even set up a company for this sole purpose for various tax or other reasons. Is there a difference between this latter situation and that of the plaintiff in the case before the Quebec courts and the Supreme Court? Possibly not. Meanwhile, if your business is defamed by the foreign government or its subsidiary – can you sue? Again, possibly not.

If you are dealing with foreign countries, you should give a quick look at the terms of the State Immunity Act. It’s better to know about it now, than to have the legislation come back and bite you in the behind later on – like it did for the plaintiff in this one case.

Something to think about.


Breach of Settlements – Elections

Wednesday, July 6th, 2011

An interesting decision was handed down by the Ontario Court of Appeal two days ago.  It deals with the concept of the “doctrine of election”.

The plaintiff sued the defendants on a promissory note and on unpaid invoices.  A settlement was entered into among the parties but the settlement was subsequently breached.  The plaintiff decided to resurrect the lawsuit and continue with it because of the breach of the settlement.  The plaintiff then tried to obtain judgment but could not do so because of a procedural technicality that isn’t important for our purposes.  So, the plaintiff tried a different approach and said, “that’s fine, but we have a settlement, so Court please give us judgment based on the settlement terms.”  The lower court agreed.  The Court of Appeal disagreed.

Madam Justice Epstein, writing for the Court, held that “[t]he essence of the doctrine of election is that a person is precluded from exercising a right that is inconsistent with another right if he has consciously and unequivocally exercised the latter.”  An example of an election would be where there is a breach of a contract (whether it be a settlement agreement or even just an ordinary contract).  On breach, the innocent party (or the one not in breach) might have the choice of either (a) keeping the contract alive and suing for damages or (b) saying that the breach has terminated the contract (and, thus, the non-breaching party is excused from any remaining obligations under the contract).  If the innocent party chooses option (a) in this example, then he/she is precluded from later changing his/her mind and going with option (b) – and vice versa.

In this case, the decision of the plaintiff to consider the settlement agreement as at an end and to resurrect the lawsuit was inconsistent with the later position seeking to obtain judgment based upon the terms of the settlement agreement.  Because of this, the doctrine of election came into play and the judgment granted by the lower court on the basis of the settlement was set aside.  The result is that the parties will now go on with their lawsuit as if the settlement agreement never existed (except, I would expect, for credit being given for any payments made under the settlement).

Why is this important for your small business?  Debt collection is a very common and important aspect of running a business.  Unfortunately, sometimes you will be required to sue to collect on your debts.  Let’s suppose that the amount you are owed is under $25,000 – which means that you can handle the lawsuit yourself in Small Claims Court.  It is quite common for settlements to be reached in collection cases in which the amount that is owing is paid out in instalments over time.  It is also, unfortunately, not uncommon for the paying party to miss a payment or to stop payments altogether.  So what do you do?  You have two choices: either you sue on the settlement or you treat the settlement as dead.  But whichever you choose, as seen by this recent case, you will be stuck with your choice. 

For what it is worth, my normal practice is to include wording in the settlement agreement that if there is a breach that is not remedied within a specified time period, then the paying party gives a consent for immediate judgment for the full amount claimed in the lawsuit less any amounts paid under the settlement.  Why do I do this?  Two reasons.  First, it gives an incentive to the paying party to not miss any payments.  Suppose my client sues you for $20,000 and you reach a settlement to pay $12,000 in 12 monthly instalments of $1,000 over the next year.  My client takes the deal because it makes whatever economic or other sense there is, but more importantly, the client agrees to take a “haircut” on what is owed and to allow the payment to be dragged out.  You get the benefit of paying less and not having to pay it up front.  While that is the “carrot”, there has to be a “stick” to ensure that you pay – and the stick is that if you don’t pay, then you immediately agree to pay the full $20,000 plus costs, so you have an $8,000 incentive (at least) to ensure that you pay.  Second, it takes away the issue of an election because in every instance my client will want to keep the settlement alive and enforce its terms.  If my client keeps the settlement alive, then it can bring a motion for judgment (in this example) for the full $20,000 owing and will immediately get judgment without a fight.  If my client doesn’t keep the settlement alive, then all it can do is go back and continue the lawsuit and my client will then have to fight whatever issues exist and the defendant will continue to drag things out as long as possible.

So, if you should enter into settlement negotiations on any collection matters and you get into a settlement arrangement, keep in mind both the existence and ramifications of the doctrine of election, but also keep in mind that you can avoid problems with this doctrine by incorporating concepts such as the consent to judgment in full described above.

Something to think about.


You Don’t Pay Unless We Win – Really?!

Tuesday, July 5th, 2011

I’m sure you’ve gone past a bus bench or watched a commercial and heard someone saying “you don’t pay [legal fees] unless we win.”  Let’s put that a bit more properly – “you don’t pay unless we win, for the most part.”  I saw one of these ads the other day and it made me uncomfortable – like it always does.

Let’s start with the basic premise in Ontario: whichever party loses will normally be required to pay at least a part of the winning party’s legal costs.  Now take this a step further – how much has to be paid?  Usually it’s around 50% of legal fees (not exactly but it’s a rough and ready guide) but it could go up as much 75% or so.  Bear in mind, though, that this is for legal fees.  Then there are disbursements, or out-of-pocket expenses, which are reimbursed 100%.  If, for example, an expert witness is hired for the case, then 100% of his/her fees is payable and this can be a significant amount so it’s sometimes not proper to focus only on the lawyers’ fees.

If that is the basic premise, then how can the lawyers say that you don’t pay unless they win?  Well, this is where it gets tricky.  What does your retainer with your lawyer say?  You can be guaranteed that if you have a case that is likely to lose, any lawyer who is willing to take files on a contingency basis (a percentage share of the winnings) or on speculation (agreeing to not charge you his/her fees unless you win) will simply not take your case.  [And I should take this opportunity to quickly state, before the questions come as they always do, that I no longer take cases on either a contingency or speculation basis.]  But what if you have a case that has a chance of winning but also some element of losing – in other words, most cases?  The question you should be asking is “whom” are you not required to make payment to?  Clearly it is not to your lawyer – whether you hire them on a contingency or a speculation basis.  But are you still required to pay the other side?  In most instances, the answer would be “yes” because I do not anticipate seeing your lawyer shelling out of his/her own pocket the other side’s legal fees.  So that is a risk that you might face.  Did you know that?

In fairness, though, it is not uncommon for the other side to agree to let the case be dismissed “without costs”.  Let me give you a rough example.  Suppose that A sues B for $1 Million and at the end of examinations for discovery A determines that his chances of success aren’t great.  Let’s also suppose that up to this point B has spent $20,000 in legal costs.  If B was to obtain judgment dismissing the action right now (and assuming that A hasn’t acted like a jerk in the litigation), then B would be awarded somewhere around $10,000 in legal costs.  But let’s suppose that A decides to roll the dice and take the matter to trial and, again, suppose that the costs to go to the end of trial would be another $20,000.  If B were to get judgment today, he would receive $10,000 of his $20,000 spent to date back in costs – but he would have $10,000 in “sunk costs”.  If the parties go to trial and B gets the case dismissed, then he would likely spend another $20,000 to get an additional $10,000 in costs.  Or, put another way, his sunk costs just increased from $10,000 today to $20,000 by the end of the trial.  And, of course, this assumes that A is good for the money.  When faced with this reality, it is not uncommon for parties in B’s position to simply agree to walk away now without any costs because it’s not economically worth it to fight on.  In that instance, then, if A has a contingency or speculation retainer with his lawyer, then he truly doesn’t pay if his lawyer doesn’t win because he hasn’t had to pay his lawyer (since the lawyer didn’t win) and he doesn’t have to pay B because the deal was cut by which B wouldn’t seek costs.  But what happens if the economics are different and B is willing to fight on?  Or what if B doesn’t care about the money and wants to fight on because of the principal of the matter?  In those situations, A will not have to pay his lawyer, but he will have to pay part of B’s costs.  So much for “you don’t pay unless we win”.

A similar situation occurs in class action lawsuits.  This is the mechanism where David takes on Goliath.  No problem if you are an unnamed member of the class.  But what if you are the nominal plaintiff?  Then you could be facing HUGE legal costs.  An example of this was a decision last month where two individuals and a company decided to take on ScotiaBank, BMO and TD Bank.  They brought claims for class action certification and they lost.  The banks sought almost $810,000 in costs.  While the Court clearly took pity on the plaintiffs, they were still required to pay $175,000.  Assuming that these costs are split 3 ways, how would you like to be the person who is facing judgment for costs against you for almost $60,000?  Again, so much for “you don’t pay unless we win”.

In the end, is “you don’t pay unless we win” correct?  It often is the case – but it’s not guaranteed.

Something to think about.


Dealing with the Banks – Lost ATM Cards

Saturday, July 2nd, 2011

Not too long ago I happened to notice that an extra $300 was missing from my bank account.  This struck me as odd, so I had a printout made of my most recent transactions.  It showed me that just over $300 was taken out the day before from a purchase at a Petro Canada station at a point in time when I knew that I was stuck in traffic, so it couldn’t have been me.  Moreover, I couldn’t have been purchasing any gas at Petro-Can since the gauge in my car was hovering at just above empty at the time and I was taking money out for, among other things, the purpose of buying gas.

What did I do?  I immediately brought this to the attention of my branch and asked them to investigate it.  They did whatever investigation they did and the result was that my money was refunded.  Why did I tell them right away?  Because I do litigation for the Banks and I know fully that they all have roughly the same wording on their ATM card agreements.  When I got my new card, I also received a copy of the cardholder agreement.  It has two key passages that I want to quote for you:

You are responsible for the care and control of your Card and PIN. You must keep your Card and PIN confidential and take every reasonable precaution to maintain them safely. …

You are responsible for the full amount of all activity on your account completed through an electronic financial service resulting from:

  • The use of your Card and/or PIN by you or any persona to whom you have made the Card and/or PIN available where you have not been the victim of trickery, force, intimidation or theft;
  • Your failure to notify us as soon as you become aware that your PIN may have become known to someone else or your card has been lost, stolen or misused; and
  • An entry error or a fraudulent or worthless deposit made through an electronic financial service.

Your liability may exceed your account’s credit balance or available funds if:

  • The account is a credit card account or a line of credit account, has overdraft protection, or is linked with another account having some or all of these features.

In other words, if you do not immediately advise the Bank of any problems OR if you do not keep safe the PIN on your ATM card, the Bank can (and will, since I have litigated these matters for the Bank on many occasions) refuse to do anything and you are stuck with the loss – which, if your card has access to either your credit card or your line of credit, could be quite large.

Have you read your bank agreements?  If not, you might want to take a look.  You would be surprised at what you have agreed to with the Bank.  Are they unfair agreements?  No.  But if you do not know what the rules are and you fail to abide by them, it can only be to your detriment.

Something to think about.