What obligations does a bank have to warn a customer about potential fraud?

Understanding the significance of Zheng v. Bank of China (Canada) Vancouver Richmond Branch 2023 BCCA 43 in the current climate of increased financial scams. 

The facts in the British Columbia Court of Appeal case of Zheng v. Bank of China (Canada) Vancouver Richmond Branch 2023 BCCA 43 may not sound unique in a world where scams are becoming increasingly common and sophisticated.  

The plaintiff, Ms. Zheng, was convinced by a fraudulent person to transfer $69,000 from her account with the respondent the Bank of China (Canada) to an account in another person’s name at a Hong Kong branch of the Bank. She later learned that the person who contacted her was a fraud, and that the local media had reported this type of fraud occurring even before the transaction she was involved in. She subsequently sued the Bank of China (Canada), alleging they knew of this type of prevailing fraud at the time of the transaction. 

As part of the transfer process, the Bank had Ms. Zheng sign an Application for Remittance that incorporated an exclusion-of-liability clause that specifically excluded the bank from liability for “any cause beyond its control” and any “incorrect or improper payment to any person…unless caused solely by the negligence or willful misconduct of the Bank.” 

The Bank applied for summary dismissal of the claim on the basis that there was no genuine issue for trial. This application was granted by a Master, and upheld upon appeal to the Supreme Court of British Columbia, where the Chambers Judge found that the exclusion clause applied and therefore Ms. Zheng’s claim was bound to fail. 

A genuine issue for trial

Ms. Zheng appealed the decision of the Chambers Judge to the British Columbia Court of Appeal, who disagreed and found there was a genuine issue for trial.  

The Court disagreed with the Chambers Judge that the exclusion clause applied to preclude Ms. Zheng’s claim and, by analogy to the decision of Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways) 2010 SCC 4, found that Ms. Zheng had an available argument at trial that the Bank’s error arose before the processing of the transfer instructions, and therefore before she signed the Application for Remittance. More specifically, the Court found that Ms. Zheng had an argument available at trial that the duty to warn arose when she first advised the teller that she wanted to make the $69,000 transfer.  

In addition, the Court found that there was a genuine issue for trial as to the enforceability of the exclusion clause and whether in the circumstances it was unconscionable. The evidence filed by the Bank in support of the summary dismissal did not address whether it knew of the prevailing fraud and had a duty to warn, or the issue of unconscionability.  

The Court specifically made note of evidence that Ms. Zheng was not a sophisticated person with a large income, that she was vulnerable to the prevailing fraud, and that the transaction she intended was highly suspicious in light of the large sum involved, the fact that it practically emptied her bank account by way of transfer out of the jurisdiction, and the Bank’s knowledge of her employment and intended use for the account. 

The Court, citing Uber Technologies Inc. v. Heller 2020 SCC 16 highlighted that an unconscionable and unenforceable bargain can arise when there is a significant inequality of bargaining power and the contractual term is improvident, and that standard form contracts have features that make them more susceptible to being found unconscionable. The Application for Remittance that Ms. Zheng signed was a standard form contract, which Ms. Zheng had no ability to negotiate. The Court noted that the question of whether there was substantial unfairness in the bargain will depend on the findings of fact at trial, and especially the Bank’s knowledge about the type of fraud at issue.  

The Court unanimously concluded that if the Bank knew of the prevailing fraud and did not warn her after she informed the Bank she wanted to make the transfer, and before having her fill out and sign the Application for Remittance, there was a genuine issue for trial as to whether the exclusion clause applied and whether it was unconscionable or unenforceable. 

It is also important to note that the Court of Appeal agreed with the Chambers Judge that there is law to support that a bank owes a duty of care to its customers, including a duty to inquire in the face of the bank’s knowledge of a potential fraud, and cites a number of authorities at paragraph 39 for this proposition. 

For Ms. Zheng, all this decision means is that her claim will be permitted to proceed to trial, and not necessarily that liability will be found on the part of the Bank. However, the discussion by the British Columbia Court of Appeal, and in particular the concept that a Bank, when they have knowledge of a prevailing fraud, may have an obligation to warn its clients about that fraud, could have significant implications for Banks and other financial institutions.  

Key takeaways

The following are key takeaways when considering the Court’s comments: 

  • Up-to-date education for customers regarding fraud should be top-of-mind, and in particular for those in vulnerable groups who may be more susceptible to fraud; 
  • Employees of Banks and financial institutions should be well educated on the topic of fraud as well, including education on how to properly communicate with customers if they are concerned a customer might be the victim of fraud; 
  • Policies should be put in place to assist employees to deal with these issues, and to ensure proper documentation while communicating with customers regarding potential fraud; and 
  • Other protections for customers, such as having all customers list a “trusted contact” on their account, could be helpful tools for customer protection and mitigating the risk of fraud generally, as well as reducing the possibility of any future legal claims. 

To find out more, please feel free to reach out directly to Danielle A. Barchyn. She practises in the advocacy department and provides general litigation services with a particular focus on professional liability defence work, regulatory issues and privacy. 

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.