D2 Contracting: B.C. Supreme Court Accepts Bank's Contractual And Statutory Defences To Forged Cheque Claim Under Canada's Bills Of Exchange Act

The recent decision of the British Columbia Supreme Court in D2 Contracting Ltd. v. Bank of Nova Scotia provides useful guidance for fidelity claims and subrogation professionals on dealing with cheque fraud losses arising from forged drawer signatures. The Court's decision demonstrates the necessity of ensuring that the insured's bank has been notified of suspected fraud or irregularities immediately upon such issues being discovered.

The Facts

D2 Contracting Ltd ("D2") was a contractor operating on Vancouver Island. D2 had two principals, Copeman and Cooper. In January 2006, D2 opened an account with the Bank of Nova Scotia ("BNS") and agreed to BNS's form of operation of account agreement ("OAA"). The signature card provided that both of Copeman and Cooper had to sign any cheque drawn by D2 on the BNS account.

Commencing in 2006, Copeman wrote 594 cheques totalling almost $1.3 million. On each of these cheques, Copeman forged Cooper's signature as second signatory. Cooper had learned of Copeman's forging of his signature as early as August 2006, when Cooper received an ordinary-course cheque issued by D2 representing his salary, but noticed that Copeman had signed Cooper's name along with his own. Cooper did not raise the issue with BNS at the time.

In June 2007, Cooper reminded Copeman that Copeman should not be signing Cooper's name to D2 cheques, even on cheques for legitimate D2 expenses. Notwithstanding this admonition, Copeman continued to do so. Cooper later admitted that he had been aware that Copeman had forged his signature on at least six cheques by mid-2008, and at least 10 cheques by February 2009. Matters came to a head in March 2009, when a cheque payable to Cooper representing his monthly salary was returned NSF by BNS. In April 2009, Cooper attended a BNS branch and reported the ongoing irregularities in the account.

D2's Claim and BNS's Contractual Defence

D2 commenced an action against BNS for recovery of the loss caused by Copeman's fraud. Under subsection 48(1) of Canada's Bills of Exchange Act (BEA), a drawee bank will be liable to its customer where the bank pays a cheque that contains a forgery of the customer's signature.

However, the statutory liability created by section 48 can be avoided by contractual verification provisions, and banks typically include provisions in OAAs which seek to accomplish exactly that. The OAA in issue here contained a verification provision which obligated D2 to review each statement...