Bank Liability for Forged Cheques

My insolvency law partner John Varley reports:

Companies victimized by forgery routinely get no support from their bankers, unless they have reported the discrepancy within the usual 30-day "monthly statement objection" period. A recent court decision may cause banks to reassess that stance, depending on the language used in the relevant account operating agreement.

In a recent case before a judge of the Ontario Superior Court of Justice, an office manager forged $186,488 of cheques and the employer company sued to recover that amount after the bank cleared all those cheques and debited the company's account.

The Court held that the bank was strictly liable for honouring the forged cheques, and that no defence was available to it. The bank's honouring of the cheques was not a mere "error, omission or irregularity", but a violation of section 48 of the Bills of Exchange Act. If (as is the case with language used by other bank agreement forms) the account agreement in this case had been more broadly worded, or had specifically mentioned forgeries, a defence would have existed, but none was available here.

Nor did the mutual negligence (of both the bank and the company) resolve the matter. The Court held that the company owed the bank no duty (at the level of due care that would have detected the forgeries) to examine the monthly bank statements and report discrepancies within the 30-day notification period stipulated by the account operating contract. Nor did it owe the bank any duty to maintain internal accounting controls to minimize or prevent forgery losses.

Regards,

Blair