"Check That Cheque" or be Left Holding the Bag

A recent Ontario Court of Appeal decision has highlighted again the perils facing banks which unwittingly negotiate fraudulent cheques. In Westboro Flooring and Décor Inc. v. Bank of Nova Scotia, the Court pinned the entire loss flowing from a fraudulent cheque scheme on the fraudster’s bank (the "Collecting Bank"), which had allowed the fraudster to deposit the fraudulent cheques into his account.

In finding the Collecting Bank liable, the Court of Appeal rejected a number of defences typically asserted by collecting banks when sued by victims of cheque fraud. Although this decision may make it more difficult for collecting banks to defend these claims, it also suggests that a collecting bank may be able to escape liability by ensuring that the name of the payee on the fraudulent cheque is identical to the name of the depositing accountholder.