In and of itself, a cheque imposes no obligation on a drawee bank to the payee

Canada Trustco Mortgage Co. v. Canada, 2011 SCC 36, released today, is an important decision dealing with the Bills of Exchange Act and, more generally, banking.

The fact that a person is designated as payee on the face of a cheque does not on its own mean that a bank is liable to make a payment to the person.  A drawee is answerable to the drawer.  The question is to whom the drawee may make the payment.  What is on the back of the cheque — the instructions or the endorsement — is crucial to this question. The Court holds:

[40]                          These provisions, read together, mirror the principles stated in Schroeder and incorporate them into the statute. A cheque operates neither as an assignment of funds in the hands of the payee nor as an assignment of funds in the hands of the drawee. It is a document by means of which a customer orders his or her banker to pay funds the banker owes the customer to a person or to the order of that person out of the account specified on it. In and of itself, a cheque imposes no obligation on a drawee bank to the payee. This interpretation is well entrenched in our law and was accepted by Canada at trial:  Schroeder; Thomson v. Merchants Bank of Canada (1919), 58 S.C.R. 287, at p. 298; Schimnowski Estate, Re, [1996] 6 W.W.R. 194 (Man. C.A.), at para. 19.

[41]                          The statutory duty of a bank to pay a cheque is governed by the rules applicable to presentment. With some exceptions, as I mentioned above, presentment is mandatory (s. 84(1) BEA). The general rule for presentment of a cheque is as follows (s. 86(1) BEA):

86. (1) Presentment of a bill must be made by the holder or by a person authorized to receive payment on his behalf, at the proper place as defined in section 87, and either to the person designated by the bill as payer or to his representative or a person authorized to pay or to refuse payment on his behalf, if with the exercise of reasonable diligence such person can there be found.

A bank may incur other liabilities in circumstances which do not arise in the case at bar, upon acceptance within the meaning of s. 34 of the BEA, for example. That is not the case here. At the time of presentment, Mr. McLeod was no longer a holder.  Only Trustco had the rights and powers of a holder in due course.