The Canadian legal system is characterised by the coexistence of both civil and common law provinces within a federal parliamentary system. Civil law is exclusively applicable in the province of Quebec, whereas common law applies in Canada's other nine provinces and three territories. The civil law tradition in Canada finds its origins in France. The common law tradition originates from British colonisation of what is now the rest of Canada.
Under the Canadian Constitution, each provincial legislature has general jurisdiction over property and 'civil law' (meaning commercial law and commercial transactions), while the federal parliament has an exclusive or paramount jurisdiction over certain private law matters, including banking, issuance of currency, bills of exchange and bankruptcy and insolvency. The country's legal system leaves open a concurrent jurisdiction between provincial and federal powers over certain legal matters. This leads to a challenging regulatory compliance landscape for those entering or operating in Canada's financial services industry. Examples of these challenges include compliance issues with an array of provincial consumer protection laws, various federal and provincial privacy laws, differential laws for issuing securities, provincially unique requirements for loan and mortgage security and a broad array of other areas of overlapping jurisdiction. There is a particular interdependence between federal and provincial legislation. This tends to cause significant challenges in terms of regulatory compliance for businesses needing to harmonise their legal compliance for operations across Canada.
The federal parliament legislates federal laws that seek to reconcile the coexistence of two fundamentally different legal systems, all within a bilingual (English and French) context. Federal statutes generally operate throughout Canada, such as the Criminal Code, the Competition Act and the Bills of Exchange Act. Further, certain commercial statutes, such as the Bank Act and the Trust and Loan Companies Act create the framework to regulate Canada's federally incorporated financial institutions.
At the provincial level, financial services businesses and financial institutions may be incorporated under applicable provincial laws for money services businesses, certain savings and loan institutions, payment processing and other related endeavours. Generally, provinces have legislative and regulatory authority limited to those entities incorporated or doing business within the provincial boundaries. Provincially incorporated entities that operate across provincial boundaries may thus be subject to the jurisdiction of multiple regulatory authorities.
The main purpose of the Bank Act and its related statutes and regulations is to provide a legislative framework that promotes the efficiency and security of the financial system in Canada, and to set national standards applicable to banking products and services. The federal authorities further regulate the 'business of banking' and related services directly or indirectly through regulators and rule-makers such as the Office of the Superintendent of Financial Services (OSFI); the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC); the Financial Consumer Agency of Canada (FCAC); Canada Mortgage and Housing Corporation (CMHC); and the Canada Deposit Insurance Company, as well as other entities within federal jurisdiction.
While some of the regulatory agencies have express authority to make and impose rules on entities operating in the area of financial services (OSFI and FINTRAC), others, such as the FCAC, have a hybrid regulatory power, applied in part by way of rights to investigate, enforce and fine for non-compliance, and in part by way of creation of 'voluntary' compliance codes that have been adopted by the Canadian financial services industry as business standard operating protocols, ignored at their peril. Regulation of the financial services industry in Canada is also accomplished by rules created by statutory corporations. One example is CMHC, for mortgage rules applicable to requirements for qualifying for mortgage insurance and securitisation of mortgage pools. Similarly, the Canadian Payments Association (now known as Payments Canada) sets the automated clearing and settlement system rules and large value transfer system rules for clearing as between members for payment items ranging from cheques and bank drafts to electronic funds transfers.
At the provincial level, each province has many similar, parallel (and sometimes overlapping) regulatory authorities for matters within provincial legislative jurisdiction.
Territorial governments for Canada's three territories have been granted similar legislative powers as conferred on the provinces.
In addition to the host of laws, regulations and rules, touched on above, Canadian businesses of all sorts must comply with an array of privacy laws, both federal and provincial, Canada's anti-spam laws that limit and prescribe requirements for commercial electronic messages and competition laws that are aimed at ensuring fair and accurate marketing of financial products and services.
Financial institutions and those entities seeking to engage in financial services in Canada will require legal advice to ensure regulatory compliance for the jurisdictions engaged and the operations undertaken.
II RECENT LEGISLATIVE DEVELOPMENTS
Consumer protection legislation
Consumer protection provisions are contained in the federal Bank Act,2 the Cooperative Credit Associations Act,3 the Insurance Companies Act,4 the Trust and Loan Companies Act5 and the Payment Card Networks Act.6,7
The key Bank Act provisions (which apply to major Canadian retail banks) include disclosure provisions regarding charges and provisions governing retail deposit accounts,8 disclosure regarding borrowing costs associated with loans9 and credit cards,10 restrictions on tied selling11 and the establishment of complaints resolution procedures.
Compliance with federal consumer protection procedures is overseen by the FCAC.
At the provincial level, each province has its own consumer protection legislation. In Quebec, for instance, the Consumer Protection Act12 provides for several types of protection for consumers. On 15 November 2017, the government of Quebec adopted the Act, otherwise known as Bill 134 (the Bill), mainly to modernise rules relating to consumer credit and to regulate debt settlement service contracts, high-cost credit contracts and loyalty programmes, in order to modernise the Consumer Protection Act (Quebec). The Bill came into force on 25 July 2019.
Consumer protection legislation is often the source of the complaints and proceedings by consumers against financial institutions.
III CHANGES TO COURT PROCEDURE
Each province has its own legislative and procedural regime applicable to whether and how multiparty claims may be brought. There are many procedural similarities across the provinces and frequently, multi-jurisdictional class actions dealing with the same foundational claims are coordinated by plaintiffs' legal counsel seeking to take advantage of the most advantageous legal and procedural jurisdiction for the claim being brought.
i Class actions
In Ontario, British Columbia and Quebec particularly, class actions against banks are becoming more common and broad. The class action procedure in Quebec varies from the procedures in force in the common law provinces.
ii Quebec-based class actions and their criteria
When compared to the certification process in common law provinces, Quebec procedure is streamlined and designed to avoid lengthy contestations. In fact, Quebec is perceived across the country as a friendly forum for plaintiffs, as well as for the counsel acting on their behalf in class actions.
For example, the plaintiffs' motion for authorisation for certification does not have to be supported by an affidavit. For authorisation purposes, the facts alleged in the motion are deemed to be true and hearsay evidence is usually allowed (though its probative value may be limited). Moreover, the defendant can only contest the authorisation orally (i.e., without written pleadings) and must obtain the court's permission to present any evidence (e.g., deposition of the plaintiff or relevant documentary evidence). Finally, plaintiffs have a direct right of appeal if the authorisation is denied by the court of first instance; whereas the defendant, on the other hand, must obtain leave before appealing authorisation.
To be authorised, the proposed class action must satisfy the following four cumulative criteria set out under Article 575 of the Code of Civil Procedure:
- The court authorises the class action and appoints the class member it designates as representative plaintiff if it is of the opinion that:
- the claims of the members of the class raise identical, similar or related issues of law or fact;
- the facts alleged appear to justify the conclusions sought;
- the composition of the class makes it difficult or impracticable to apply the rules for mandates to sue on behalf of others or for consolidation of proceedings; and
- the class member appointed as representative plaintiff is in a position to properly represent the class members.
The burden is on the plaintiffs to show that the criteria are satisfied. That said, Quebec courts have set a low threshold for each criterion. Moreover, any doubt as to whether a criterion has been met will be resolved in favour of the plaintiff.
The first criterion will generally be met as long as the proposed action raises a single issue that is common to the class and is not negligible.13 The second criterion will be met if the plaintiffs can make out an 'arguable case' on a prima facie basis, no matter how slim the chances of success may be on the merits.14 The third criterion will commonly be met if there are at least a few dozen class members. As for the fourth and final criterion, a representative plaintiff should only be excluded if its interest or competence is such that the case could not possibly proceed fairly.15
iii Recent application by the court of the criteria
Through the recent case, Asselin v. Desjardins Cabinet de Services Financiers Inc, the Quebec Court of Appeal has further lowered the threshold at the authorisation (certification) stage, by reversing once again a Quebec Superior Court decision that had refused to authorise a class action.
In doing so, the appellate court criticised the lower court judge for permitting the parties to present a substantial evidentiary record, as it led to a more detailed analysis than was appropriate at the authorisation stage. However, on 27 June 2019, a motion for leave to appeal before the Supreme Court of Canada was granted. The outcome will be of great interest, as it should set the level of in-depth analysis that judges should apply in the review of grounds of defence.
In the interval, in 2019, BLG,16 representing several banks, was able to obtain the dismissal of two separate certification motions against its clients pertaining to overlimit transactions and fees on credit cards as well as to mortgage prepayment fees based on interest rate differential (IRD) calculations that exceed three months' interest.17 As plaintiffs benefit from an appeal as of right, both cases have been submitted to the Court of Appeal of Quebec, and it will be interesting to see how the Court will review these judgments in the permissive authorisation context mentioned above.
iv A call for change in the industry: settlement process and class counsel fees
On 23 January 2017, the Superior Court of Quebec rendered an important judgment on settlement approval motions in four related class actions.18 The actions involved unilateral credit limit increases, over limit fees, cash advance fees and interest calculations, with plaintiffs alleging various violations of Quebec's Consumer Protection Act. Similar or related settlements with other banks had been previously approved for each cause of action involved. The Superior Court's decision to refuse approval of the proposed settlements came as a surprise to many.
In its review of the traditional seven criteria, the Court moved to refuse to approve the settlements largely based on the disproportion between the fees payable to class counsel and the compensation to be granted to members.
On 1 March 2018, the Court of Appeal dismissed the appeals and confirmed the decision of the Superior Court.19 The decision reiterates the important role of the courts to carefully review the fairness of any class action settlements, and that it is not bound in any way by their terms and conditions. As the approval of the legal fees by the Court was a precondition of validity and enforcement of the settlement agreements, the Court of Appeal confirmed that the Superior Court was constrained to refuse approving them.
IV PRIVILEGE AND DISCLOSURE
The presumptive rule in Canadian litigation is that every document in the possession or control of a party must be produced, if it is relevant or material to a fact at issue, unless covered by some privilege. The actual test, whether 'relevance' or 'materiality', differs slightly across the provinces. In addition, entities that are not party to the litigation can be compelled to produce documents in their possession or control.
The most important exception to the obligation for the production of documents in the possession of parties jointly contemplating litigation arises from solicitor–client or litigation privileges. Such privileges allow the parties to seek legal advice in relation to the strengths and weaknesses of their case, strategies for pursuing or defending the claim and to conduct investigations in furtherance of the litigation, all without the obligation to disclose the documents created or the advice or information received. However, privilege can be lost or waived through disclosure of the documents, information or advice to parties outside of the directing minds of the relevant parties or through other means.
Solicitor–client privilege applies to communications between lawyer and client, including certain third parties as experts or agents. The communication must involve the giving or seeking of legal advice and must intend to be kept confidential. However, the communication does not need to relate to a 'specific' request for legal advice. Such privilege is permanent.
Litigation privilege applies to communication or documents that have been created or gathered for the 'dominant purpose' of litigation. The test of the dominant purpose requires that proceedings were a reasonable possibility at the time of communication and that the communication was made for that proceeding. One of the key differences with the solicitor– client privilege is that the litigation privilege ends with the litigation for which the documents were prepared, unless related proceedings ensue.
V SOURCES OF LITIGATION
Banks, financial institutions and other financial services providers are frequently the targets of litigation claims, all based on the confluence of potential for large value claims and the perception of 'deep pockets'.
In Canada, the banker–customer relationship is fundamentally contractual. Historically, a contract governing a bank account consisted mainly of implied terms.20 Those terms were developed by the common law courts from the late 1600s onwards, and some of them were later codified in what is now the Bills of Exchange Act. Most bank account agreements are standard form contracts of adhesion. However, terms may still be implied.21
The banker–customer relationship is primarily one of debtor and creditor and is not fiduciary in nature. A fiduciary relationship arises only in special circumstances of vulnerability, duty and a reasonable expectation of paramount loyalty. It is the rare exception between a banker and customer that such a relationship ever arises. Further, the banker– customer relationship does not establish a trust over the funds on account. Simply put, under Canadian law, when a customer deposits money in an account at its bank, the customer is loaning money to the bank, and the bank becomes indebted to and obliged to repay the customer in accordance with the customer's directions, subject to any defences that arise from the terms of the contract between the bank and customer.
As at 2019, cheques and other paper-based payment items remain common. Nearly a billion cheques are issued and processed in Canada each year.
The negotiation of cheques is governed by the Bills of Exchange Act. Banks commonly face claims relating to the misuse of cheques, including claims relating to cheque forgery, conversion, counterfeits, and material alterations.
i Forged signature (front of cheque)
A cheque is a direction to pay, written by the drawer or customer, directing the drawer's banker to pay a sum certain to the payee.
When a cheque is issued by an individual, then it is a simple question of whether the drawer authorised or signed the cheque and whether they intended to have it issued. The question of forgery of the signature in these circumstances is a question of fact and not legally complex. If the signature on the cheque was forged, the item is a nullity, and then there is no actual mandate by the customer to their banker, and the banker is presumptively liable to its customer for paying on the cheque without mandate.
When a cheque is issued by a corporation, the simple question above becomes more complex. Who were the 'authorised signatories' of the corporation? Did the corporation intend to issue the cheque to the named payee or someone else?22 What if an authorised signatory forges the signature of a second signatory when two must sign or causes a cheque to be issued to someone who is not owed money by the corporate drawer?23 Under Canadian bills of exchange law, these simple questions have led to some very complex law.24 The general rule remains that a forged signature of the drawer, with respect to a bill payable to order is a nullity that shifts the loss to the drawee bank. Yet the general rule is riddled with exceptions that flow from subtle factual differences that purport to be based on the intentions of the drawer as a corporation, or revert the loss back upon the corporate customer based on contractual preclusion defences.25
ii Forged endorsement (back of cheque)
When a cheque is delivered from the drawer to the payee, the payee becomes the holder of the cheque. The cheque can then be further negotiated by endorsement, transfer or delivery. If negotiated for value, then the next party to the cheque becomes a 'holder in due course' with a presumptive right to enforce the cheque for payment. However, what happens when the endorsement of the payee has been forged? This simple question again has multiple answers, each of which depend on subtle differences between whether the endorsement was a necessary element for negotiation of the item. If the cheque was drawn to 'order', meaning a specific intended payee, then a forged endorsement breaks the chain of validity of negotiation and the parties to the cheque after the forged endorsement are presumptively liable for the tort of conversion.26 In contrast, if the cheque was originally drawn to 'bearer', meaning it was drawn to a fictitious payee, then the endorsement by the payee was not necessary, and it is irrelevant that the endorsement was forged.27
iii The tort of conversion
The strict liability tort of conversion is used to allocate losses for misappropriated cheques. A conversion is a wrongful interference with goods, such as by taking, using or destroying them in a manner inconsistent with the owner's right of possession. To constitute the injury there must be some act of the defendant repudiating the owner's right, or some exercise of dominion inconsistent with it. The wrongful act may be done in all innocence, but this is no defence. Any negligence on the part of the drawer or the banks in preventing the fraud is irrelevant.28
This tort claim is a common method by which to allocate cheque fraud losses up to the collecting bank or to any other parties that negotiated the cheque after the item was issued. There are a few limited defences to these types of claims,29 but under Canadian law (unlike UK legislation) contributory fault of the drawer is not a basis for apportionment of the loss.30
iv The tort of knowing receipt
The cause of action in knowing receipt arises simply because the defendant has improperly received property that belongs to the plaintiff. This type of claim remains common against financial institutions on the asserted basis that the bank has received funds that were fraudulently taken from an innocent victim. The plaintiff's claim amounts to nothing more than, 'You unjustly have my property. Give it back'. Unlike the similarly named tort of 'knowing assistance', there is no finding of fault, no legal wrong done by the defendant and no claim for damages. It is, at base, simply a question of who has a better claim to the disputed property. In order to recover the disputed property, the plaintiff must prove the following: (1) that the property was subject to a trust in favour of the plaintiff; (2) that the property, which the defendant received, was taken from the plaintiff in breach of trust or breach of fiduciary duty; and (3) that the defendant did not take the property as a bona fide purchaser for value without notice. The defendant will be taken to have notice if the circumstances were such as to put a reasonable person on inquiry, and the defendant made none, or if the defendant was put off by an answer that would not have satisfied a reasonable person.31
Claims of this nature are brought against banks and other financial service businesses on the basis that they were or should have been put on notice about the suspicious circumstances by which the bank's customer delivered funds and that the bank failed to investigate owing to negligence or wilful blindness. A proliferation of Ponzi scheme claims have used this legal theory against banks to advance claims for the victims of the scheme, yet very few claims have successfully demonstrated bankers' liability for such.
v Customer impersonation – misdirected payments
Cheques and the law of bills of exchange evolved in an era when 'banks were taken to know the signature of their customer'. Thus, it was reasonable that the presumptive loss allocation for forged signature was directed at the drawer's bank for paying without mandate and that the loss allocation for forged endorsement situations flowed to the collecting bank that allowed itself to deal with a rogue. In contrast, the world of payments and banking has evolved considerably with mobile payments, internet banking and the expectation of 24/7 financial access, anywhere, anytime. As payment systems have evolved to meet customer expectations, customer safety and security for their personal access devices, and the modes used to instruct the bank, have become a target for identity thieves, whether by hacking, phishing, sniffing or stealing the devices used. In consequence, customer losses and claims against banks are on the rise in relation to said evolving issues and questions about litigation proliferates over loss allocations suffered by customers that have been fraudulently induced to misdirect payments by third-party hacking (social engineering impersonation frauds) or customer internal employee fraud losses through misuse of electronic banking authorities.32
In one recent claim scenario, a bank customer sued his bank for losses owing to fraudulent email instructions that caused a wire transfer to be issued to his detriment. The terms of the application and the account agreement entitled the customer to provide instructions to his bank by email address and the customer previously did so without complaint to effect a wire transfer. The bank was contractually entitled to rely on those instructions. The customer had the sole ability and responsibility to control the security of the email account that was the source of the impugned instructions, yet the customer's email account was hacked and fraudulent instructions were issued. The court held that the contractual exclusions in favour of the bank were valid, that the bank had not been grossly negligent by failing to follow up and enquire of the instructions and as such allocated the loss to the customer.33
While the loss allocation in Du v. Jameson Bank is supportable on the circumstances of the case, this decision further illustrates the importance of ensuring clear, unambiguous terms and conditions in the customer account agreement. A well-drafted account agreement that defines and limits the mutual expectations for fraud prevention, detection and allocation will go a long way to limit losses owing to claims.
Recently, the Court of Appeal of Quebec in Compagnie d'assurances générales Co-Operators v. Coop Fédérée held that electronic funds transfers do not constitute bills of exchange or instruments within the meaning of the Bills of Exchange Act.34 Electronic funds transfers are only payment orders containing the conditions triggering the electronic transfers of funds. The notion of negotiability is foreign to funds transfers, since they do not imply any procedure for presentation for acceptance or payment as is the case with bills of exchange. On the contrary, the transfer of funds is immediate and definitive and its beneficiary has no title or document allowing him to demand payment.
vi Privacy and data breach
Canadian financial institutions have long had traditional duties of customer confidentiality for personal information. The obligations for customer confidentiality are now further codified in legislation, such as the Personal Information Protection and Electronic Documents Act, applicable to federally regulated institutions (i.e., banks), and at the provincial level by substantially similar provincial laws where such are enacted. They set out principles regarding how organisations must handle the collection, use and disclosure of personal information in the course of their commercial activities. The overarching principle is that collection, use and disclosure of personal information collected by financial institutions in respect of customers requires the consent of the individual except in narrowly defined circumstances set forth in the legislation.
VI EXCLUSION OF LIABILITY
In both common law and civil law, courts have recognised that an explicit and clear stipulation to exclude liability of the financial institution is valid when such stipulation specifies the acts for which an exoneration applies. Such clauses are normally interpreted restrictively by courts, against the financial institution, but always in a manner that best reflects the common intention of the parties.
In the context of fraudulent signatures, for example, banks are deemed to know the signature of their clients and are responsible for all unauthorised payments made from a cheque on which the signature has been forged. Nonetheless, courts have frequently recognised the validity of agreements requiring the customer to verify the signature of the cheques signed or to notify the bank of any erroneous debits within a certain delay.35
Canadian business leaders are facing an economy that is increasingly complex and unpredictable. They are not only affected by the policies of Canada's federal and provincial governments, but also by international changes, such as the rise of populism and protectionism. This combination is bound to raise the level of uncertainty for all businesses. Trade agreements, cross-border commerce and the market implications of legalising cannabis are, for instance, topics that may have serious impacts on the Canadian economy.
As for the topics covered above, it remains that all signs indicate that the trend of litigation and of class actions becoming more common and broader in scope will continue. With large-scale data breaches dominating headlines, expect to see numerous proceedings aimed at financial institutions related to privacy and cybersecurity issues.
1 Graeme A Hamilton, Mathieu Lévesque and D Ross McGowan are partners at Borden Ladner Gervais LLP (BLG). The authors wish to thank Frédérique Drainville, associate, for her contribution to the preparation of this chapter.
2 Statutes of Canada (SC) 1991, Chapter 46.
3 SC 1991, Chapter 48.
4 SC 1991, Chapter 47.
5 SC 1991, Chapter 45.
6 SC 2010, Chapter 12, Section 1834.
8 Bank Act, Sections 439.1 to 447.
9 Bank Act, Section 450.
10 Bank Act, Section 452(1.1) and (2).
11 Bank Act, Section 459.1.
12 Revised Statutes of Quebec, Chapter P-40.
13 See Vivendi Canada Inc v. Dell'Aniello, 2014 SCC 1; Sibiga v. Fido Solutions Inc, 2016 QCCA 1299.
14 See Infineon Technologies AG v. Option consommateurs, 2013 SCC 59; Charles v. Boiron Canada Inc, 2016 QCCA 1716; Sibiga v. Fido Solutions Inc, 2016 QCCA 1299; Asselin v. Desjardins Cabinet de Services Financiers Inc, 2017 QCCA 1673.
15 See Infineon Technologies AG v. Option consommateurs, 2013 SCC 59; Sibiga v. Fido Solutions Inc, 2016 QCCA 1299.
16 Borden Ladner Gervais LLP.
17 Brook v. Toronto-Dominion Bank (CS, 2019-07-15), 2019 QCCS 2898; Pilon v. Option Consommateurs (C.A., 2019-08-12), 2019 QCCA 1361.
18 Option Consommateurs v. Banque Amex du Canada, 2017 QCCS 200.
19 Option Consommateurs v. Banque Amex du Canada, 2018 QCCA 305.
20 Canadian Pacific Hotels Ltd v. Bank of Montreal  1 SCR 711, 1987 CanLII 55 (SCC).
21 BMP Global Distribution Inc v. Bank of Nova Scotia  1 SCR 504; Chriss v. The TD Bank Financial Group, 2013 ONSC 7508 (CanLII).
22 Teva Canada Ltd v. TD Canada Trust  2 SCR 317, 2017 SCC 51 (CanLII).
23 D2 Contracting Ltd v. The Bank of Nova Scotia, 2015 BCSC 1634 (CanLII) 2016 BCCA 366 (CanLII).
24 Canadian Pacific Hotels Ltd v. Bank of Montreal  1 SCR 711, 1987 CanLII 55 (SCC).
25 D2 Contracting Ltd v. The Bank of Nova Scotia, 2015 BCSC 1634 (CanLII) 2016 BCCA 366 (CanLII).
26 Boma Manufacturing Ltd v. Canadian Imperial Bank of Commerce  3 SCR 727, 1996 CanLII 149 (SCC).
27 Fok Cheong Shing Investments Co Ltd v. Bank of Nova Scotia  2 SCR 488, 1982 CanLII 57 (SCC).
28 Arrow Transfer Company Ltd v. Royal Bank of Canada et al  SCR 845, 1972 CanLII 135 (SCC).
29 National Holdings Ltd v. CIBC et al, 2005 BCSC 369 (CanLII).
30 GE Capital Canada v. Bank of Montreal, 2003 BCSC 1180 (CanLII).
31 Vancouver Coastal Health Authority v. Moscipan, 2019 BCCA 17 (CanLII).
32 St Lawrence Testing & Inspection Co Ltd v. Lanark Leeds Distribution Ltd, 2019 ONSCSM 69697 (CanLII) and Malcolm Silver et al v. State Farm Fire and Casualty Company, 2019 ONSC 4264 (CanLII).
33 Du v. Jameson Bank, 2017 ONSC 2422 (CanLII).
34 Compagnie d'assurances générales Co-Operators v. Coop Fédérée, 500-09-026586-172; 500-09-026587-170 (CA).
35 Arrow Transfer Company Ltd v. Royal Bank of Canada et al  SCR 845; Productions Mark Blandford Inc v. Caisse populaire St-Louis de France, 2000 CanLII 10274 (CA); Aliments C&C Inc. v. Banque Royale du Canada, 2014 QCCA 1578.