Cheques remain a popular payment method for many businesses and individuals today, but their use also brings with it the risk of fraud. This risk was at the heart of the legal battle between Austral Imports Inc. and the Bank of Montreal in a case that dealt with the effectiveness of contemporary account verification and related obligations.
Austral Imports Inc. was a Canadian company that imported Australian-made products for distribution in Canada. In 2000, the company opened a chequing account with the Bank of Montreal using the bank’s standardized documents, including an account authorization and verification agreement in the form of a directors’ banking resolution and a specimen signature card signed by Austral’s two principals. The account agreement specified that Austral’s two principals had signing authority, and both were required to sign for amounts over $500.
However, in 2001, Austral hired an office manager to handle its banking functions, and the office manager committed fraud by forging a single signature on 95 Austral cheques payable to themselves and drawn on Austral’s account with the bank. Each of the forged cheques was for an amount over $500, and the fraud scheme continued for a year until Austral discovered it. The losses totalled $124,476.81.
Austral sued the bank for negligence, alleging that the bank was negligent in not monitoring the account and clearing the forged cheques with only one signature, when the account agreement required two signatures for amounts over $500. Austral argued that the bank’s negligence made it liable for the unauthorized payments charged to its account, even though the account agreement contained an exculpatory clause protecting the bank from liability for customer loss due to fraud by the customer’s employee doing the customer’s banking functions.
On the other hand, the bank argued that it had acted with reasonable care and due diligence concerning the operation of the Austral account. It contended that it was impractical for the bank to scrutinize all customer cheques for proper signing and that the account agreement fairly allocated to Austral the responsibility to verify proper signatures on its cheques on a timely basis and to prevent its employee from forging signatures on its cheques. The bank maintained that it was not in proximity to the fraud committed by Austral’s employee and that the exculpatory clause in the account agreement protected it from liability.
The court agreed with the bank and dismissed Austral’s claim for negligence. It determined that the banker and customer relationship was governed mainly by contract and that the exculpatory provision governing forgery was effective in releasing the bank from liability for the forged cheques charged to the Austral account during the 30-day period immediately preceding Austral notifying the bank of the problem. The court concluded that the cause of Austral’s loss was the forgeries by its office manager and not the unauthorized nature of the cheques and breach of authority by the bank.
The court also found that the account agreement specifically allocated to Austral the responsibility to verify proper signatures on its cheques on a timely basis and to prevent its employee from forging signatures on its cheques. The bank was not negligent, and the exculpatory clause totally protected it. The bank was not in proximity to the fraud committed by Austral’s employee.
In conclusion, the Austral Imports Inc. v. Bank of Montreal decision provides a valuable lesson for businesses and individuals who use cheques as a payment method. It emphasizes the importance of carefully reviewing and understanding the terms and obligations outlined in account agreements, including exculpatory clauses, and taking responsibility for monitoring and verifying the proper signing of cheques. Ultimately, the decision reaffirms the principle that the banker and customer relationship is mainly governed by contract law and that strict adherence to the terms of the agreement can significantly impact the outcome of any legal dispute that may arise.
