Civil fraud is a term that can send shivers down the spine of business owners and consumers alike. For the uninitiated, it conjures up images of shady characters, broken contracts, and lost fortunes. But what is civil fraud exactly, and how does it differ from other forms of deceitful conduct? This blog post aims to unravel the complex, intricate, and often misunderstood world of civil fraud in a manner that is comprehensive yet accessible to the average reader.
Civil fraud, also known as deceit, is a serious economic tort or civil wrong that involves a deliberate deception through false representation. It requires four elements: a false representation by the defendant, their knowledge (or recklessness) of the falsehood, the plaintiff’s action influenced by this representation, and a loss suffered by the plaintiff as a result. This intentionally dishonest conduct is distinct from mere negligent errors, with civil fraud requiring actual reliance on the fraudulent information and intent to deceive.
A CLOSER LOOK AT THE ELEMENTS OF CIVIL FRAUD
To fully grasp civil fraud, let’s delve into each of its essential components:
(A) FALSE REPRESENTATION MADE BY THE DEFENDANT
There are two crucial aspects to this element: what amounts to a representation, and what makes a representation false for the purpose of the tort.
(i) What Counts as a Statement or Action that Could be Misleading?
Statements or actions can take many forms, and both words and behaviour can be seen as making a statement. Something as simple as a nod in response to a question can be viewed as making a claim. For instance, if a contract is handed over for signing and it contains a term that is different from what was previously agreed upon, this could be taken as a silent, misleading statement. However, not all actions carry an unspoken guarantee that there won’t be any issues with a proposed deal. As an example, ordering advertising even when there might be difficulties making payment has been ruled as simple silence, with deception only happening when false promises about the ability to pay were given.
There’s a wide range of situations where one party knowingly exploits the other party’s lack of knowledge. Deception could be concluded if the accused does something that assures the other party that everything is fine, when in reality, it’s not. At the other extreme, there are cases where one party stays silent while knowing the other party is under a false impression, and generally, there’s no obligation to correct this misunderstanding.
In between these two extremes, there are scenarios where one party indirectly contributes to the other party’s mistaken belief without directly causing or confirming it. This could involve actively keeping the other party from finding out the truth. In real estate, for example, actions such as hiding flaws in a property that’s being sold, misguiding inspectors, or blocking access for an inspection have been ruled as deceptive statements. However, selling a property that is known to be unsuitable for the buyer’s intended use is not seen as an indirect misleading statement.
Personal involvement in the deceptive statement is necessary for civil fraud, which is a legal wrong involving personal dishonesty. It’s not sufficient to merely know about the fraud or to benefit from it, as shown in the case of Bruno Appliance and Furniture Inc. v. Hryniak.
It’s hard to draw the line between deception and silence when one party knows about a significant flaw but deliberately keeps quiet, hoping the other party won’t find out. Choosing not to speak up is only blameworthy when there’s an obligation to warn the other party. However, Canadian courts have ruled in favour of fraud for not disclosing known but hidden defects in real estate, especially when the defect makes the property unlivable or unsafe. This doesn’t apply to obvious defects, which could be found through a reasonable inspection, as it would go against the principle of “buyer beware.” This exception to the rule is questionable in its logic, potentially bypassing the rule that there’s no implied guarantee of quality or suitability in real estate sale contracts.
(ii) How Do We Determine if a Statement or Action is Misleading?
Establishing whether a defendant’s statement is misleading involves examining four key elements:
- Fact-based: The statement must be something that can be assessed as either true or false, meaning it typically conveys a fact.
- Timing: The point at which the truth or misleading nature of the statement is assessed is vital. This could be when the statement was first made, when the person taking legal action responded to it, or at other possible moments.
- Completeness: Statements that are technically true but lack critical information can potentially be viewed as indirectly misleading. This usually happens when the information left out would significantly change the interpretation or understanding of the part that was provided.
- Ambiguity: A statement can be understood in more than one way. If one way of interpreting the statement is false while another is true, it creates a challenge when trying to determine the overall truth or misleading nature of the statement.
- Is It Fact-Based?
Establishing whether a statement is based on facts is a vital step in civil fraud cases. Here are some important points to consider:
Opinions and Predictions: Generally, expressions of opinion or forecasts about future events aren’t considered factual statements. Nonetheless, such statements could suggest certain facts. For instance, when a person shares an opinion or makes a forecast, they are indirectly suggesting that the facts they know align with that opinion or forecast. If this indirectly suggested factual basis is incorrect, the opinion or forecast could be considered deceitful. Consider this: a real estate agent reassures a potential buyer that a property’s value will double in the next five years. If the agent is aware of plans for a landfill site near the property, which would likely decrease its value, this forecast could be deceitful. The agent’s forecast suggests that the facts they know support the projected increase in value, which is false.
Promises: A promise isn’t inherently true or false. However, when a person makes a promise, they are indirectly suggesting they intend to keep it. If they make a promise they don’t intend to fulfill or know they can’t fulfill, it might be considered an indirectly deceitful misrepresentation. For example, if a contractor promises to use high-quality materials for a home renovation but plans to use inferior materials to reduce expenses, this promise could be deceitful. The contractor is suggesting they will act in a certain way, but this suggested action is false.
Intentions: A declaration of intention, even if not a promise, can be false if the person making the statement doesn’t actually have that intention. For example, a computer equipment distributor who secured unauthorized discounts by presenting certain firms as potential buyers, while actually planning to sell the equipment to others, was found guilty of civil fraud.
- The Role of Timing
The timing of a statement and subsequent events can impact its accuracy. If a statement that was accurate when made becomes incorrect due to changing circumstances, and the person who made the statement doesn’t rectify it, the statement can be regarded as fraudulent. Moreover, even if a person amends an incorrect statement they made, it may not be sufficient if the original incorrect statement continues to sway the other party.
- The Importance of Completeness
A statement can be seen as false if it’s deceptively incomplete, even if the portion that is conveyed is factually correct. Leaving out key information, supplying an answer that is technically right but misleading, undertaking actions to purposefully conceal significant facts, and making statements that are factually accurate but deceptive can all be classified as fraudulent.
- Navigating Ambiguities
In civil fraud cases, what matters more is the belief or intention of the person making the statement, rather than the objective truth or falsehood of the statement. If the person making the statement (the representor) genuinely intended the statement to be understood in a different way, which they honestly believed to be true, then the component of fraudulent intent is absent, even if the receiver of the statement reasonably relied on its objective meaning. In simple terms, the emphasis is on the representor’s subjective understanding of the statement, not necessarily how the receiver comprehended it.
If the representor didn’t realize their statement could be misconstrued, even if their choice of words was unfortunate, they can’t be deemed fraudulent or dishonest. Their objective wasn’t to mislead.
However, the believability of the representor’s interpretation also comes into play. The more implausible the representor’s supposed understanding of the statement is, the less likely the court will accept their claim of innocence. The representor’s interpretation of their own statement needs to be realistic to be credible. If it seems like the representor is trying to dodge responsibility by providing an unlikely interpretation of their words, their claim of innocent intent might not stand up in court. Thus, the decision of fraud in these scenarios often hinges on the credibility and the feasibility of the different interpretations of the statement.
(B) KNOWLEDGE (OR RECKLESSNESS) OF THE FALSEHOOD
For a defendant to be liable for civil fraud, they must either knowingly utter a false statement or show indifference as to the statement’s truthfulness. Moreover, they should intend for the statement’s recipient to act based on it. This intention encompasses both the action of making the false assertion and the expected result of having the recipient depend on it.
In the landmark case Derry v. Peek, the House of Lords clarified that for a civil fraud lawsuit to hold water, the plaintiff must demonstrate that a false assertion was made consciously, without believing in its truth, or recklessly, without caring whether it’s true or not. If a person utters a statement with a sincere belief in its truth, it can’t be deemed fraudulent.
In this context, the House of Lords drew a sharp line between recklessness and simple negligence. Unlike negligence, recklessness is sufficient to prove fraud. In terms of civil fraud, a person is seen as reckless if they express a statement with moral indifference to its truth.
For a corporation to be found guilty of fraud, a specific individual within the corporation must make a representation, acting within their real or perceived authority and possessing the necessary mindset. This means a corporation can’t be deemed fraudulent just because one employee utters a statement another employee knows is false. The corporation can only be considered as acting fraudulently if a specific individual within it behaves in a fraudulent manner.
Made With the Intent to Deceive
The intent to mislead is a pivotal element of civil fraud. The defendant must have intended for the plaintiff to depend on their false assertion. If the defendant doesn’t aim for anyone to act based on their false claim, but the plaintiff does, it doesn’t result in liability for civil fraud. Similarly, if the defendant hopes for a third party (not the plaintiff) to rely on their assertion, and the plaintiff discovers the statement and acts on it, there’s still no liability for civil fraud.
The case of Peek v. Gurney illustrates this principle. In this case, company directors misrepresented the firm’s business in a prospectus to entice individuals to purchase shares. The plaintiff, however, didn’t directly acquire shares but bought them on the stock exchange. The court ruled that although the original shareholders might have had a civil fraud claim against the directors, the plaintiff did not.
The intent to mislead must be specifically targeted at the plaintiff. If the plaintiff perceives a statement in one way, while the defendant intended it to mean something different, the plaintiff has no civil fraud claim unless the defendant recognized how the plaintiff was likely to interpret the statement.
It’s essential to understand that a fraudulent intention isn’t the same as an intent to harm. The court in Derry v. Peek differentiated between dishonesty in the criminal law sense and dishonesty concerning civil fraud. A person can be found guilty of civil fraud even if they didn’t aim to harm the plaintiff and even if their motive wasn’t fraudulent. Instead, the court will scrutinize the circumstances, including the nature and character of the representations made, the purpose for which they were made, the knowledge or means of knowledge of the person making them, and the intent to induce those outcomes which are the natural consequence of one’s actions.
(C) THE PLAINTIFF ACTED IN RELIANCE ON THE FALSE REPRESENTATION
Causation Issues in Civil Fraud
Civil fraud, like other torts, faces complex causation issues due to both evidentiary and conceptual challenges. The evidentiary difficulty arises because the plaintiff’s case depends on comparing their actual actions with what they might have done had the defendant not committed the fraudulent act. Conceptually, the problem lies in determining the role the defendant’s act or omission played in influencing the plaintiff’s actions, and whether it changed the course of action the plaintiff would have otherwise taken.
Role of Materiality
The law primarily addresses these issues by determining whether the misrepresentation was “material”, i.e., a significant factor in the plaintiff’s decision. Materiality is judged from the plaintiff’s subjective viewpoint. If the plaintiff can’t prove that they interpreted the statement in the way it was falsely represented, they fail to establish that they relied on the false statement. However, the court’s evaluation of materiality doesn’t solely depend on whether a reasonable person would have been induced. The defendant can disprove the plaintiff’s reliance on the representation by showing the plaintiff knew the truth while proceeding with the transaction, among other ways.
Reliance and the Burden of Proof
The question of whether the plaintiff would have proceeded with the transaction even if the truth had been known is at the court’s discretion. It’s not about whether the misrepresentation was the decisive factor, but whether it had some influence on the decision.
There are two views on the burden of proof on the question of reliance, as highlighted by the British Columbia Court of Appeal in Sidhu Estate v. Bains. One view suggests that if the representation was material, the burden of proof shifts to the defendant to show that the plaintiff did not rely on the statement. The other view holds that the plaintiff always carries the burden of proving reliance.
Intention to Induce and Scope of Liability
The defendant’s intention to induce doesn’t need to be directed specifically at the plaintiff. It suffices if the defendant intends to induce an act by a group of people which includes the plaintiff. However, if the statement isn’t directly conveyed to the plaintiff, the plaintiff’s reliance, and thus the connection to the defendant’s intention, may be too indirect for an action in civil fraud. The law exercises caution not to extend the liability for this tort excessively.
Civil Fraud in Canadian Law
Civil fraud, often associated with criminal offences, possesses distinct characteristics in Canadian law, offering an array of civil actions specifically aimed at fraudulent activities. Civil actions require a lower burden of proof than criminal cases (“balance of probabilities” versus “beyond a reasonable doubt”) and mainly aim to provide financial compensation to the victim.
The choice to pursue a civil suit is at the discretion of the victim and their lawyer, while a criminal prosecution takes into consideration public interest and the likelihood of conviction. Therefore, in cases where a conviction seems unlikely, a civil action may be more suitable.
The Necessity of Inducement in Civil Fraud
Canadian cases are divided on the requirement of inducement in civil fraud. Some cases, like Snell v. Farrell, demand proof that the plaintiff wouldn’t have incurred the injury without the defendant’s tortious conduct. Conversely, other cases like 3Com Corp. v. Zorin International Corp., suggest that once all elements of the tort of deceit are proven, except reliance, the burden of proof shifts to the defendant to show that the plaintiffs weren’t induced by the misrepresentation. The necessity of inducement as an element of civil fraud remains an open question.
This question was addressed in Bruno Appliance and Furniture Inc. v. Hryniak. In this case, although the main focus was on the appropriateness of summary judgments, Justice Karakatsanis, on behalf of the Supreme Court, affirmed that “requiring the plaintiff to prove inducement” aligns with Snell v. Farrell. The elements of the tort of civil fraud were defined as:
- A false representation made by the defendant.
- Some level of awareness of the falsehood of the representation on the part of the defendant (either through knowledge or recklessness).
- The false representation led the plaintiff to act.
- The plaintiff’s actions resulted in a loss.
Inducement and Causation
Importantly, civil fraud requires that the defendant’s false representation induces the plaintiff to act. A mere causal connection is insufficient. It’s noteworthy that Justice Karakatsanis’s examination of civil fraud case law didn’t refer to cases like 3Com Corp. v. Zorin International Corp., which suggested a burden shift to the defendant.
Civil Fraud and Criminal Fraud
Despite having a lower burden of proof than criminal fraud, civil fraud isn’t a “catch-all” action that plaintiffs can use indiscriminately. To establish civil fraud, plaintiffs must demonstrate a loss, whereas criminal fraud merely requires showing that the victim’s interests were put at risk. A statement won’t constitute civil fraud if there’s a “reasonable basis” for it and it was made in “good faith.” This is an important and unique distinction between criminal fraud and civil fraud, and it can lead to a peculiar outcome where there’s a criminal conviction (with a higher burden of proof), but no civil liability (where the burden of proof is lower).
(D) THE PERSON CLAIMING FRAUD FACED SOME SORT OF HARM
For a claim of civil fraud to hold up, the person who says they’ve been defrauded (the plaintiff) needs to have suffered some kind of harm. This doesn’t necessarily mean they’ve lost money. If they’ve faced any negative outcomes because they believed and acted on the dishonest information, that counts as harm.
The harm doesn’t have to be a financial loss. It could be a physical injury, being tricked into an illegal marriage, or even just having to deal with inconvenience or emotional stress.
When it comes to money matters, the person claiming fraud doesn’t need to have ended up poorer overall. They might have been fooled into missing a chance to make more money, or into agreeing to be paid less than they should have been by someone else. In both cases, they would have suffered harm, and that’s what’s important for a civil fraud claim.
REMEDIES IN CIVIL FRAUD
The main aim of solutions or remedies in civil fraud cases is to help the victim return to the situation they were in before the fraudulent event took place. The two most common types of remedies include compensation and the cancellation of the fraudulent transaction.
Compensation in civil fraud cases is designed to make up for the victim’s losses that resulted from the fraudulent act. These losses could be monetary or non-monetary. The goal is to get the victim back to where they were before the fraudulent activity took place.
Unlike in other types of civil wrongs, compensation in civil fraud is not just limited to the losses that could have been predicted at the time of the fraudulent act. The person who committed the fraud could be held accountable for all the direct losses suffered by the victim, even if these losses were not reasonably predictable.
The reasoning behind this is simple: a person who engages in fraudulent activities should not be able to limit their responsibility based on what they could have anticipated at the time of their fraudulent act. This concept underscores the seriousness of fraud and the broad public interest in discouraging such behaviour.
Cancelling the Fraudulent Transaction
Cancelling the fraudulent transaction, also known as rescission, is another solution available in civil fraud cases. Rescission essentially ‘reverses’ the deal that was based on the fraudulent claim. This implies that the involved parties are returned to their original state before the transaction occurred.
Rescission can be a bit complicated, especially in situations where the transaction involved transferring money or property. The court may need to make a series of decisions to ensure that the parties are returned to their original status. This could involve returning the property or money, or ordering the payment of damages instead of returning the property.
However, rescission might not always be an option, particularly when it’s impossible to restore the parties to their original state or when the rights of a third party have gotten involved.
For instance, if a property sale induced by fraud has been made to a third party who bought it in good faith, the court may not be able to ‘reverse’ the deal to restore the parties to their pre-agreement states. This is because rescission could unfairly impact the rights of the innocent third-party buyer. In such circumstances, the court may instead award damages as a more suitable solution.
Also, rescission may not be granted if it would result in the victim unjustly benefiting or if the victim has accepted the contract even after discovering the fraud. Acceptance of the contract happens when the victim, upon discovering the fraud, decides to continue with the contract instead of seeking to cancel it.
MAKING AND SUBSTANTIATING FRAUD CLAIMS
Given the severe impact and potential fallout of fraud accusations, a more rigorous degree of accuracy and specificity is needed when making and validating claims of fraud in a civil lawsuit, compared to other types of civil cases.
Making a Fraud Claim
When making a fraud claim, the case must accurately and specifically lay out the details of the alleged fraudulent behaviour. This includes the when and where of the fraud, who was involved, and the exact fraudulent actions that took place. Although the claim needs to be detailed, it’s not necessary to use the word “fraud” directly in the claims. The allegations made by the person suing (the plaintiff), if proven true, should be enough to establish fraud. The case can continue as long as any differences between the evidence and the claimed facts don’t hinder the person being sued (the defendant) from putting up their defence.
Substantiating a Fraud Claim
In civil fraud cases, the level of proof required is the balance of probabilities. This means that the plaintiff needs to show that it’s more likely than not that the fraud took place. The Supreme Court of Canada has clarified that this standard of balance of probabilities is about the strength of the evidence, not the extent of probability that needs to be proven. There’s only one standard for civil cases, which is the balance of probabilities.
Distinguishing Between Civil Fraud and Fraudulent Misrepresentation
Fraudulent misrepresentation and civil fraud, while they might sometimes be used interchangeably, are distinct ideas with separate components that need to be proven. Fraudulent misrepresentation is more about the plaintiff’s dependence on the false representation and requires the plaintiff to prove a specific set of elements. Regardless of whether the plaintiff is claiming fraud or fraudulent misrepresentation, the claims must provide full details to inform the defendant of the case they need to respond to.
Specifics in Claims
Complete details must be included in the claims, whether the plaintiff is claiming fraud or misrepresentation. This ensures the defendant is fully aware of the case they’re being asked to respond to and can prepare a suitable defence.
Several defenses can potentially be raised in a civil fraud claim.
Agreement Despite Knowing About the Fraud
One of these defences is that the person bringing the case (the plaintiff) knew about the fraud but decided to go ahead with the deal anyway. There are many reasons someone might choose to do this. They might want to keep good business relationships, not be sure if they have the right to back out of the contract or plan to go through with the deal now and sue for damages later.
Shared Blame (i.e., Contributory Fault)
Another possible defence is to claim that the plaintiff is partly to blame for their own losses. However, this defence often doesn’t hold up in civil fraud cases. For a long time, the law has recognized that someone who’s been tricked into a contract can defend themselves against accusations that they should have been more careful.
Protection in the Contract Itself
Another potential defence is if there are specific clauses in the contract that protect the accused person. However, this defence also has its limits. As a rule, you can’t use a contract to avoid responsibility for fraudulent statements that were used to convince someone to sign the agreement in the first place.
RESPONSIBILITY OF PEOPLE OTHER THAN THE ONE MAKING FALSE CLAIMS
When Employees or Agents are Responsible
In situations involving deception in a civil matter, the superiors (employers or principals) can be held responsible for the deceitful behaviour of their workers (employees or agents).
When Company Officers and Workers are Personally Accountable
Since civil deception is considered an act of personal dishonesty, a worker or company official who knowingly makes false claims for their company is usually considered personally accountable in civil deception cases.
Shared Responsibility in Deception
In situations where one individual makes a false claim, and others knowingly partake in the deception, those other participants can also be held responsible as shared wrongdoers. This responsibility applies even if they didn’t personally make the false statements, but knew about the deception and silently approved of it.
Shared wrongdoers don’t need to be directly involved in the deceptive act; their knowledge and silent approval of the deception are enough to make them liable. This highlights how seriously the courts take deception. It’s not just the act of deception itself but also the involvement in or support of the deceptive scheme that makes one liable.
Sometimes, a legal case against multiple parties involved in a deceptive scheme could be set up as a shared wrongdoing of conspiracy. This gives an alternate way to prove shared civil deception, whereby the person making the claim can hold each participant in the deceptive scheme responsible for the entire loss, regardless of how much they individually contributed to the deception. This further emphasizes the commitment of the legal system to ensure that victims of deception are fully compensated and that those involved in deceptive activities are held accountable.
Civil fraud is a complex area of law, fraught with intricate considerations at every stage of the process. From the exacting standards required in pleading and proving fraud to the nuanced defences available, each case presents a unique set of circumstances that must be carefully examined within the legal framework.
While the law is designed to provide relief and recourse for victims of fraud, it also demands a high standard of proof and provides several defences for those accused. This balance reflects the gravity of fraud allegations and the potential consequences for the parties involved.
Whether one is a victim seeking justice or an accused party aiming to present a robust defence, understanding the complexities of civil fraud law is crucial. However, this blog post is only a general overview. Each case is unique and necessitates individual legal advice. Therefore, if you find yourself needing to navigate the complexities of civil fraud, engaging a lawyer with expertise in this field is strongly recommended.
Ultimately, the intricacies of civil fraud law reflect society’s commitment to maintaining honesty and integrity in civil dealings. By holding those who commit fraud accountable and providing redress for victims, the law plays a crucial role in upholding these fundamental values.
EXAMPLE: Soil Engineers Ltd. v. Upper
In this case, the plaintiff, a soil engineer consulting firm providing services to residential and commercial developers, sued a former project manager (the defendant) for fraudulent misrepresentation and deceit. The defendant had falsified many reports and documents, including those related to environmental site assessments and forms required under the Environmental Protection Act. This misconduct, which occurred over three years, forced the plaintiff to redo some work and compensate clients affected by the inaccurate reports.
The court ruled in favour of the plaintiff. The defendant’s actions were found to be deliberate, potentially risking public health, and included attempts to hide his deceit. He provided no explanation or assistance to rectify the problems caused.
Consequently, the plaintiff was awarded $629,246 in pecuniary damages. This amount covered the labour expenses, costs of third-party assistance for redoing the work, client fee waivers, settlements with clients, investigation costs, and a fine paid to the Ministry of the Environment.
Additionally, the plaintiff was granted $50,000 for the loss of reputation. The firm had to disclose the defendant’s misconduct to its clients, which resulted in the loss of some clients and the payment of a fine.
Lastly, the court imposed $20,000 in punitive damages on the defendant, which are damages exceeding simple compensation and awarded to punish the defendant for his egregious conduct.