S.N.S. Industrial Products Limited v. Bank of Montreal

S.N.S. Industrial Products Limited v. Bank of Montreal Collection Decisions of the Court of Appeal Date 2010-07-12 Neutral citation 2010 ONCA 500 Docket numbers C50154 Judges MacPherson, James C.; Cronk, Eleanore Ann; Karakatsanis, Andromache Rhea Subject Civil Decision Content CITATION: S.N.S. Industrial Products Limited v. Bank of Montreal, 2010 ONCA 500 DATE: 20100712 DOCKET: C50154 COURT OF APPEAL FOR ONTARIO MacPherson, Cronk and Karakatsanis JJ.A. BETWEEN S.N.S. Industrial Products Limited Plaintiff (Respondent) and Bank of Montreal Defendant (Appellant) Barbara L. Grossman and Brendan Bissell, for the appellant John W. McDonald, for the respondent Heard: July 6, 2010 On appeal from the judgment of Justice J. A. Ramsay of the Superior Court of Justice, dated February 5, 2009. By the Court: [1] The appellant, Bank of Montreal (the “Bank”), appeals from the trial judge’s decision awarding the respondent, S.N.S. Industrial Products Limited (“SNS”), the sum of $186,488 for losses arising from forged cheques drawn on its account with the Bank, together with prejudgment interest and costs. SNS cross-appeals from the trial judgment, seeking further compensatory damages in the amount of $66,000 on account of additional forged cheques drawn on its account and an award of punitive damages against the Bank in the amount of $132,000. [2] In our view, both the appeal and cross-appeal must be dismissed. I. The Appeal [3] The sole issue on appeal concerns the interpretation of a verification of account clause (the “Verification Clause”) in a banking agreement between the parties that was in force when various cheques were improperly drawn on SNS’ account with the Bank by an SNS employee who forged the signature of SNS’ authorized signing officer on the cheques. [4] The Verification Clause read as follows: 6.5 The Bank shall render each month (unless otherwise instructed in writing) to the Corporation a statement of its account together with cheques and other vouchers where applicable for amounts charged to the said account. The Corporation will advise the Bank promptly if the monthly statement has not been received within ten days of the date upon which it is normally received. 6.6 Upon receipt of the aforesaid statement of account, the Corporation will check the debit and credit entries, examine the cheques and vouchers and notify the Bank in writing of any errors, irregularities or omissions. This notice will be provided to the Bank within 30 days of the mailing to the Corporation or if not mailed, within 30 days of the delivery to the Corporation. At the expiration of the 30 day period (except as to any alleged errors, irregularities or omissions outlined on the said notice) it shall be conclusively settled between the Bank and the Corporation, subject to the right of the Bank either during or after the 30 day period to charge back items for which payment has not been received, that the statement and the balance shown thereon are correct, the said cheques and vouchers are properly charged to the Corpora-tion’s account and the Corporation is not entitled to be credited with any sum not credited in the statement. It shall be conclusively settled as between the Bank and the Corporation that the Bank is not liable for any loss or claim arising from the breach by the Corporation or any third party of any fiduciary duty or trust in respect of the sums or dealings noted in the said statements. [5] SNS sued the Bank for recovery of the amount of the forged cheques that were debited to its account by the Bank, relying on s. 48(1) of the Bills of Exchange Act, R.S.C. 1985, c. B. 4. Under that provision, “where a signature on a bill of exchange is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative…”. [6] The Bank defended the action, arguing that the Verification Clause provided a complete defence to SNS’ claim. The trial judge disagreed. He held, in effect, that the Verification Clause did not apply to forged cheques because the honouring of a forged cheque did not constitute an “error, irregularity or omission” within the meaning of those terms as used in the Verification Clause. [7] We agree that the Verification Clause does not afford a valid defence to the Bank in this case, although for reasons that differ somewhat from those of the trial judge. [8] The applicable principles of contractual interpretation are well-established. As this court recently stated in Dunn v. Chubb Insurance Company of Canada (2009), 97 O.R. (3d) 701 (C.A.), at para. 32, “The primary goal of contractual interpretation is to give effect to the intentions of the parties.” See also Bell Canada v. The Plan Group (2009), 96 O.R. (3d) 81 (C.A.), at para. 37. In accordance with the normal rules of construction, the court searches for an interpretation of a disputed contract which, from the whole of the document, “would appear to promote or advance the true intent of the parties at the time of entry into the contract”: Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance, [1980] 1 S.C.R. 888, at p. 901. In this interpretive inquiry, the context or factual matrix surrounding the contract is relevant. As this court has indicated, commercial contracts are to be interpreted, “with regard to objective evidence of the factual matrix underlying the negotiation of the contract, but without reference to the subjective intention of the parties”: Dunn, at para. 34, note 4 (citations omitted). [9] The Verification Clause does not refer expressly to forged cheques or otherwise to cheques debited to a customer’s account for improper purposes or by illegal means. Further, the terms “error”, “irregularity” and “omission” are not defined in the Verification Clause. Nor is their meaning clear on a plain reading of the Verification Clause as a whole. Thus, the meaning of these terms is not apparent on the face of the Verification Clause. Certainly, the scope of these terms would not be self-evident to many, if any, customers of the Bank without clarification or explanation. It is difficult to conceive, therefore, absent evidence to the contrary that does not exist in this case, that both parties intended, when the banking agreement was entered into, that the Verification Clause would extend to forged cheques honoured by the Bank. [10] Obviously, the Bank was free to include a specific definition or other clarification of these terms in the Verification Clause if it wished to do so. Indeed, the evidence at trial, and the Bank’s own pleading, established that the Bank included specific reference to forgery – albeit in the context of cheque endorsements – in a subsequent version of a verification of account clause in a later banking agreement with this same customer – SNS. [11] It is true that the Verification Clause imposed certain obligations on SNS in relation to monthly account statements furnished by the Bank. It is also true that the Verification Clause afforded certain protections to the Bank, which were designed to limit its liability, if SNS did not fulfil its obligations under the Verification Clause. [12] But in this case, when SNS sought specific information from the Bank regarding the timelines for verification of its account entries, it was informed in a memorandum by its contact at the Bank as follows: Message: Hi Don, As requested by Choui and Tara here is the information you requested: 1. Forged Endorsement – there is no time line if there is a forged endorsement on cheques, there is a declaration form that needs to be filled out and signed for the file. 2. Altered Cheques – if a cheque is altered you have 90 days following receipt of the cheque, there is a declaration form that needs to be filled out and signed for the file as well. 3. Counterfeit Items – if a cheque is counterfeit you have 24 hours following receipt of the cheque to have it returned. 4. Stolen – if a cheque is stolen, you notify the bank immediately and we put a stop payment on it. After 6 months the cheque becomes stale dated and will not be processed for this reason. [13] This memorandum can only have left SNS with the impression that no verification timeline applied and, therefore, that the Verification Clause did not apply, to forged cheques. We note that the subject heading to the memorandum read: “Timeline for Forged/Altered/Counterfeit/Stolen Cheques”. No distinction was drawn in the memorandum between forged “endorsements” and other types of cheque forgeries. Moreover, the memorandum set out applicable timelines for the recovery of funds from the Bank in relation to altered, counterfeit and stolen cheques. There was no indication that forged cheques not involving forged “endorsements” fell into a separate and more exacting verification category. There is no suggestion that the information contained in the memorandum was withdrawn or corrected at any time by the Bank. [14] Verification of account clauses of the type at issue here form part of the Bank’s standard form account documents prepared by the Bank to govern its relations with its customers. We agree with SNS that clauses of this kind are to be construed strictly and, in the event of any ambiguity, against the Bank, as the author of the clause, in accordance with the doctrine of contra preferentem: see Dunn, at para. 36. [15] A forged cheque is not simply a bill of exchange that does not conform with requisite formalities. As properly acknowledged by the Bank before this court, it is an invalid cheque for want of proper authorization. By operation of s. 48(1) of the Bills of Exchange Act, except for specific circumstances that are inapplicable here, a forged signature on a cheque is “wholly inoperative”. It might reasonably be expected, therefore, that any intention by the parties to include forged cheques in the ambit of the Verification Clause would have been stated in clear and unambiguous language. That did not occur in this case. [16] In all these circumstances, we are not persuaded that the Verification Clause operates in this case to afford the Bank a defence to SNS’ claim. The trial judge was therefore correct to hold that the Verification Clause did not exempt the Bank from liability under s. 48(1) of the Bills of Exchange Act. We endorse the trial judge’s observation that, on this record, it appears that “[no one] on either side gave the verification agreement a thought”. II. Cross-Appeal [17] There are two aspects to SNS’ cross-appeal. First, SNS argues that the trial judge erred by failing to award additional compensatory damages in the amount of $66,000 for other cheques allegedly forged by SNS’ employee and honoured by the Bank. [18] We reject this claim. The focus of SNS’ pleading was on compensation for forged cheques totalling $186,488. This is the amount eventually awarded to SNS by the trial judge. SNS led no properly admissible evidence at trial to prove forged cheques in any additional amount. As the Bank points out, various means were available to SNS to do so, including: the calling of evidence from the police officers involved in the forgery investigation; moving prior to or at trial to compel production by the Bank of copies of the additional cheques that the police regarded as forged; or, cross-examining the Bank’s witnesses at trial concerning these additional cheques. SNS, however, failed to take any of these steps. In these circumstances, the trial judge was fully justified in concluding that SNS had failed to meet its evidential burden to prove the honouring by the Bank of forged cheques in excess of those reflected in the compensatory damages awarded by the trial judge. [19] The second aspect of SNS’ cross-appeal concerns its renewed claim that it is entitled to punitive damages. The trial judge fully considered and rejected this claim. On the factual findings of the trial judge, he was right to do so. We note, in particular, the trial judge’s findings that SNS’ employee “did a good job at forging the signature of her principals”; that the Bank was not negligent for cashing the cheques in question; and that while the Bank’s conduct, including its treatment of SNS after the fraud was discovered, was “inefficient and unimpressive”, it was not “such as to give rise to aggravated or punitive damages”. We see no basis on which to interfere with these findings or with the trial judge’s ruling that punitive damages were not warranted. III. Disposition [20] For the reasons given, the appeal and cross-appeal are dismissed. As success has been divided, we make no order as to the costs of this proceeding. RELEASED: “JCM” “J. C. MacPherson J.A.” “JUL 12 2010” “E. A. Cronk J.A.” “Karakatsanis J.A.”