You Just Discovered Cheques were forged on your Bank Account
Forged cheques present a real threat to the ongoing viability of any business. As a small business owner you trust your employees to oversee marketing, sales, staffing and accounting. But what happens when you are not diligent in reviewing cancelled cheques, and worse your employee has forged cheques for the past several months. The first thing you should look to is the “verification of account” clause in that agreement you signed with the bank. In most cases, the verification of account clause requires you to report any errors, irregularities or omissions to your bank within thirty (30) days after the receipt of your account statement. Such was the case in a recent Court of Appeal decision, S.N.S. Industrial Products Limited v. Bank of Montreal.
In S.N.S, the court of appeal considered a situation where forged cheques were drawn on its business account with the Bank of Montreal. S.N.S. ultimately sued the Bank of Montreal for all losses arising from the forged cheques and in doing so, relied on section 48(1) of the Bills of Exchange Act, which provides “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…” Many of the forged cheques were older than thirty days. The Bank defended the claim on the basis that the Verification Clause required S.N.S. to report any “errors, irregularities or omissions” to the bank within thirty (30) days following the receipt of the Statement of Account.
The Court of Appeal upheld that the Verification Clause had no application to the case. First, the clause did not specifically refer to forged cheques and the terms “errors, irregularities or omissions” were not specifically defined. Thus the meanings of the terms were not apparent on the face of the Verification Clause and not otherwise self explanatory. Second, the Bank of Montreal sent a memorandum to S.N.S. indicating that there was no time line regarding the reporting of forged cheques. This left S.N.S. with the impression that no verification timeline applied, and therefore the Verification Clause did not apply to forged cheques. Finally, the Court of Appeal construed the Verification Clause very strictly against the Bank and concluded that had the Bank intended to include forged cheques among the ambit of the Verification Clause, it would have used clear and unambiguous language.
Lesson learned: I realize that in operating your busy business, many demands pull at your time and it’s true that in this case, the customer won the battle. However, the simplest, least expensive way to deal with this situation is to pay close attention to your monthly statements and report any issues to the Bank immediately! Spend the time; after all, the money in your account is the life blood of your business.