Is employer responsible for the criminal fraud of an employee?

Bank of Montreal v. Charlottetown (City), 2004 CarswellPEI 98, 2004 PESCTD 78 (P.E.I.T.D.)

Between February 1996 and March 2003 David Campbell, while working for the City of Charlottetown, fraudulently used the city’s bank accounts with the Royal Bank of Canada (RBC) to steal more than $468,000.

As part of the fraud Campbell deposited and cashed cheques at a branch of the Bank of Montreal (BMO). When his wrongdoing was identified, Campbell was dismissed. He was later convicted of fraud and theft, both criminal charges.

The BMO had to reimburse the RBC for the full amount, and filed an action against the city of Charlottetown claiming the city is vicariously liable to the bank by reason of the fraud perpetrated by its employee. It is also claiming against the city on the grounds of negligence.

The city filed a motion to have BMO’s case rejected by the court before it proceeded any further. The city claimed that vicarious liability (whereby an employer is held liable for the damages caused by the negligence of its employee) does not apply in banking cases and that neither it nor negligence applies when a forged instrument is used.

The city argued the legal principle to be applied in this case is that of conversion, the civil tort when criminal theft takes place. Conversion is a strict liability offence, and the BMO would thus have no claim against the city for the $468,000 it lost. If this is not a case of conversion, the city insists, then how did the BMO suffer its losses?

The city added that since the BMO accepted for deposit the illicit cheques, made their proceeds available to Campbell and then collected the face value of the cheques from the Royal Bank, that BMO is prima facie liable to the city in conversion. The BMO cannot then turn around and start an action against the city for negligence, the city argued.

BMO countered that its claim against the city is not just for vicarious liability, but for vicarious liability for fraud. It also claimed the city was negligent in its supervision and control of Campbell, thus enabling him to fraudulently deprive the bank of the money.

By law striking out a statement of claim can only be done if it is “plain and obvious” that there is no valid claim of action. The court must assume the facts as pleaded in the statement of claim are proved, and it must interpret the issues as generously as possible for the claimant. If the court concludes the claim has any chance of success, then the action must be allowed to proceed. It is not a consideration at the statement of claim stage of litigation that the defendant to the claim may have a perfect defence.

In this case the Prince Edward Island Supreme Court agreed with BMO that an action for vicarious liability for fraud is reasonable. Even if a court decided the city was right and the legal issue is that of conversion, that could only be after hearing and assessing all the evidence. There is a legal rationale for arguing that the city, although not in any sense authorizing Campbell’s acts, nonetheless put him in a position whereby he was able to do what he did.

The city could therefore be answerable for his conduct, and that was for a trial to determine. Similarly, ruled the court, there was a justification in law for the bank to claim it was the city’s negligence which caused the bank’s losses and damages. There was a possibility the bank could win its case, and as such the city’s motion to dismiss the bank’s statement of claim must fail, ruled the court.

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