Previously, I have blogged on the growing fraud problem in Canada. Last year, Canadians reported losing $416 million to fraud. The scams are becoming increasingly sophisticated, and seniors are disproportionately impacted.
In my previous blog, I also summarized CBC Toronto’s tips to avoid and protect yourself from such scams. Today, I thought I would look at what, if any, obligation financial institutions may have to their customers about known financial scams.
Earlier this year, the Court of Appeal for British Columbia examined this question. In Zheng v Bank of China (Canada) Vancouver Richmond Branch, 2023 BCCA 43, the Plaintiff was targeted by a scam that ultimately led to her transferring $69,000 to a bank account in Hong Kong (which represented almost the entirety of her savings). As part of the transfer process, the bank had her sign an Application for Remittance which included an exclusion of liability clause. Upon learning she was a victim of fraud, she commenced claims against her bank alleging that the bank knew or ought to have known about the fraud and owed her a duty to warn her that the wire transfer was a fraud.
The bank applied by way of summary judgment to dismiss the claim, arguing there was no genuine issue for trial. The Chambers judge agreed, and characterized the Plaintiff’s claim as requiring banks to owe their customers a general duty to investigate pervasive frauds in Canada and warn their customers about those frauds. The Chambers judge concluded that there is no such duty in Canadian law and dismissed the claim.
The Plaintiff then appealed the decision to a Supreme Court Justice (Justice Kirchner). Justice Kirchner found that while it was not plain and obvious the Plaintiff’s duty to warn claim was bound to fail, the exclusion clause provided a complete defence because the loss was not caused “solely” by the bank, the Plaintiff having provided instructions for the transfer. As part of Justice Kirchner’s conclusion that it was not plain and obvious the claim would fail, His Honour noted the following that may have triggered a duty for the bank to conduct further inquiry into the Plaintiff’s instructions: (i) her worried and stressed appearance, (ii) the fact the instruction involved a transfer of all of the money in her account, which was inconsistent with the stated purpose of the account on the account agreement, and (iii) the Plaintiff’s allegation that the bank had knowledge of the specific fraud she fell victim to.
The Plaintiff further appealed to the Court of Appeal for British Columbia. The Court of Appeal agreed with Justice Kirchner, that it was not plain and obvious that the Plaintiff’s duty to warn claim was bound to fail. The bank argued that there is no general duty on part of a bank to inquire of a customer when receiving instructions directly from that customer to transfer funds – rather, the contractual obligation of the bank is to accept the customer’s instructions. The bank referred the Court to a number of authorities supporting this proposition.
However, the Court of Appeal distinguished each case on the facts, concluding that none of the cases relied upon by the bank, involved facts where the bank:
- had knowledge of a prevailing fraud,
- the circumstances of the transaction at issue put the bank on notice that it should warn its customer of the fraud, and
- the bank had the ability to warn the customer because the customer was in the bank branch inquiring about how to carry out the transaction.
The Court of Appeal agreed with the Chambers judge that the above factors could form a basis for the Bank to owe the Plaintiff a duty to inquire and to warn her about the fact there was a fraud targeting people like her, such that there was a genuine issue for trial, unless the exclusion clause clearly applied and would otherwise defeat the claim.
The Court of Appeal concluded that it was similarly not plain and obvious that the exclusion clause applied to the transaction at issue, or that the exclusion clause was not otherwise unconscionable or voidable for public policy. The Court found the Plaintiff could argue (i) her loss was caused by the bank’s failure to inquire and warn, which arose prior to the wire transfer, and therefore fell outside the scope of the exclusion clause, or (ii) the exclusion itself was unconscionable.
The Zheng decision itself does not change the duties owed by financial institutions to their customers, however, it does provide guidance on how Plaintiffs might plead a duty to inquire/warn case.
While the question remains open – if the duty to warn/inquire exists in Canada (and specifically in BC), recently, a case out of the UK Supreme Court (Philipp v Barclays Bank, [2023] UKSC 25), with similar facts to Zheng, conclusively held that financial institutions owe no such duty where the accountholder instructs the bank to make the payment (i.e. versus instructions provided by an agent).
To read more about the Philipp decision, see here. For a helpful case commentary on Zheng, see here.
Thanks for reading!