Materially Altered Cheques: Who Bears the Loss?
You just met a nice foreign gentleman. He asks you to assist him in facilitating a transfer of funds overseas. You agree because he offers a 5% commission. He produces a cheque payable to you, for a large sum, and asks you to deposit it into your bank account. After retaining your commission, you wire the rest overseas as instructed. Easy money! Now, several weeks later, your bank wants you to pay back the entire amount of the cheque. What a surprise: the cheque was a fraud.
Surprisingly, many people are taken in by such a ruse. Is it greed, wilful blindness or just stupidity? While cheque use in Canada is on the decline, cheque fraud is reported to cost Canadian business $1 to $2 billion each year. Naturally, when your bank has to return funds credited to your account to the drawee bank, they are going to come looking for you to repay them. The law entitles them to do this.
The Supreme Court of Canada recently confirmed this by dismissing an appeal from the Ontario Court of Appeal in a case involving a materially altered cheque. Mr. Grenville-Wood met a man from Taiwan who asked him to help with a fund transfer overseas. Mr. Grenville-Wood agreed and deposited into his account a cheque payable to him in the amount of $57,000.13. His bank credited the account. Mr. Grenville-Wood kept $2,850 and wired the rest to Japan.
Some weeks later, the drawee bank returned the cheque and reclaimed the funds from Mr. Grenville-Wood’s bank who, in turn, charged back the debt to Mr. Grenville-Wood’s account. Turns out the cheque had originally been issued to another payee in the amount of only $355.12. It had been materially altered to change both the payee and the amount. Mr. Grenville-Wood claimed ignorance of this alteration (Really!).
In the result, Mr. Grenville-Wood had over $12,000 scooped from his account by his bank. The bank then sued him to recover the shortfall. Mr. Grenville-Wood defended the claim. He argued that because his account had originally been credited with the funds, and he had since spent or disbursed them (thus changing his position), he should not be required to pay the money back.
The court dismissed Mr. Grenville-Wood’s defence. At common law (and generally in a bank’s account agreement), the bank has a right to reverse a credit made to a customer’s account where there is a defect in the bill of exchange (the cheque) that was deposited. The fact the collecting bank received payment from the drawee bank is no defence to a charge back of the customer’s account once the material alteration to the cheque is ultimately discovered. While a chargeback like this should be made within a reasonable time, the law imposes no actual deadline. If a cheque is worthless, the passage of time will not change that fact.
Interestingly, Mr. Grenville-Wood also tried on the argument that because he had told his bank about the circumstances surrounding the deposit of the cheque (including the transfer of most of the funds overseas), the bank owed him a duty to warn him the credit to his account was only provisional and might later be reversed if the cheque was dishonoured. The court rejected this argument, noting that the bank had no duty to warn Mr. Grenville-Wood. The bank could not give any meaningful assurance about the validity of the cheque, nor could it reasonably know whether it might later be dishonoured. Mr. Grenville-Wood was the person best placed to prevent the loss and to make inquiries about the validity of the cheque.
As is often the case, if someone presents you with a proposal that is “too good to be true”, there is likely more to it than you are being told. You deal with these people at your peril and may well unwittingly be risking considerable financial loss.