Tanya Walker of Walker Law recently spoke to CBC News to provide a legal perspective on Toronto Fraud investigations. You can watch the interview here. In the story, CBC highlights the growing complexity of fraud schemes and the challenges in holding perpetrators accountable.
If you are the victim of fraud, such as wire-transfer fraud or e-transfer, what recourse do you have from a legal perspective?
Consider the following hypothetical scenario:
Where a computer fraudster assumes control of Victim A’s email account and, impersonating Victim A, issues fraudulent wire-transfer or e-transfer instructions to Victim B, who then transfers funds intended for Victim A to the fraudster’s account, is Victim A responsible for the loss and out of pocket funds?
The St. Lawrence Facts
For the parties in the recent fraud litigation lawsuit St. Lawrence Testing & Inspection Co. Ltd. v Lanark Leeds Distribution Ltd., 2019 CanLII 69697 (ON SCSM) (“St. Lawrence”), this hypothetical question became the crux of the case.
St. Lawrence involved a simple “settlement gone wrong”. The Defendant had agreed to pay $7,000 to the Plaintiff to settle a matter. After the settlement documents were signed but before the payment was made, a paralegal in the Plaintiff’s lawyer’s office was hacked and the fraudster, pretending to be the paralegal, sent new wire-transfer instructions to the Defendant.
The settlement documents provided that the settlement payment was to be made to a Bank of Montreal Trust account, while the subsequent email from the paralegal’s email address directed that the funds be paid to a credit union in Medicine Hat, Alberta. The Defendant did not realize the fraud and wired the fraudster the $7,000. The monies have not been recoverable were assumed unrecoverable.
The Defendant argued that they had fulfilled their obligations under the settlement, while the Plaintiff argued the opposite.
The St. Lawrence Decision
The Judge noted that there was a “dearth” of case law to aid in his decision. Upon a review of one Ontario fraud case (discussed below), and review of legal commentary from the United States, the Deputy Judge formulated the aforementioned hypothetical and provided the legal test that was since followed by a British Columbia trial court in Apex Aluminum Extrusions Ltd. v KD Sales & Service Limited, 2023 BCSC 2529 (CanLII).
The test established by the Judge provides a clear, principled framework for determining liability in such cases. According to this test, the payee whose email was compromised is not liable for the loss unless:
1. There is a contract between the payee and the payor that authorizes reliance on email instructions and shifts liability for fraudulent payments back to the payee.
2. There is evidence of willful misconduct or dishonesty by payee.
3. There is negligence on the part of the payee.
As there was no contract between the parties and no misconduct, dishonesty, or negligence by the Plaintiff, the Defendant was ordered to pay the Plaintiff $7,000. While it was a “double payment” for the Defendant, from the Plaintiff’s perspective, the settlement had yet to be fulfilled.
The Deputy Judge found it appropriate to rule in this manner because, as a general rule, fairness requires that responsibility be placed on the party best able to prevent the harm. Since it was the Defendant was the one in the position to prevent the harm done onto them by the fraud, such as questioning the change of bank accounts, and not the innocent Plaintiff, the Defendant should pay twice.
Takeaway
Fraud litigation cases highlight the need for proactive measures to protect yourself and your business. If you fall victim to wire-transfer fraud or a similar scheme, the recent case law suggests that courts will side with the innocent payee, and you will likely be responsible to pay twice. Below are some key points to remember to avoid ending up in a possibly unfortunate situation:
1. Watch for unusual payment instructions or sudden changes in account details. Verify authenticity directly with the other party using established contact methods such as telephone or videoconference.
2. Ensure you are aware of and understand any contractual terms that allocate risk for fraud-related losses.
3. Protect your email and online accounts with strong passwords, two-factor authentication, and regular monitoring.
Should you have any questions relating to a possible fraud, or any other legal questions, please do not hesitate to reach out to one of Walker Law’s experienced litigation lawyers.
Tags: Fraud Litigation