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THE LITIGATOR

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Tort of civil fraud requires proof of inducement, Supreme Court rules

The Supreme Court recently redefined the requirements to establish the tort of (or tort of deceit) and held that proof that the defendant induced the plaintiff to act is a required element of the tort in Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8.

In its companion appeal, Hryniak v. Mauldin, 2014 SCC 7, the Court addresses the scope and interpretation of Ontario’s amended Rule 20 on (click here to read our article on that decision).

The facts

Albert Bruno, the principal of Bruno Appliance, met with Robert Cranston, the principal of  a Panamanian company, Frontline Investments, Inc. and executed several investment documents in favour of Frontline in 2001. In 2002, Bruno met with Cranston and Gregory Peebles, a corporate-commercial lawyer, who at the time was at Cassels Brock & Blackwell and represented Cranston, Tropos Financial Corp. and its principal, Robert Hryniak. While Hryniak was not present at the meeting, Tropos paid for Peebles’ attendance. Bruno Appliance subsequently wired US$1 million to Cassels Brock, which was intended to be invested. Bruno Appliance’s funds were never invested; instead part of the funds were disbursed to another person, Reinhard, and the remainder was substantially drained. Bruno Appliance and the plaintiffs in the Mauldin appeal commenced an action in civil fraud against Hryniak, Peebles and Cassels Brock and brought motions for summary judgment.

Was there a genuine issue requiring a trial?

The Ontario Superior Court held that Bruno Appliance established its claim in civil fraud as against Hryniak and there was no issue requiring a trial. The claim against Peebles and Cassels Brock was dismissed.

The Ontario Court of Appeal noted that Bruno Appliance’s action was complex and concluded that there were two genuine issues requiring a trial as against Hryniak, which had not been addressed by the motion judge:

  1. whether Hryniak induced Bruno Appliance to invest (a necessary element of fraud); and
  2. whether some of Bruno Appliance’s funds were misappropriated by Cranston, Hryniak, or both.

The issue before the Supreme Court was whether Bruno Appliance should receive summary judgment against Hryniak and whether proof that the defendant induced the plaintiff to act was a required element of civil fraud.

The elements of “civil fraud”

Justice Karakatsanis, writing for a unanimous Supreme Court, outlined four elements of the tort of civil fraud:

  1. a false representation made by the defendant;
  2. some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness);
  3. the false representation caused the plaintiff to act; and
  4. the plaintiff’s actions resulted in a loss.

In so finding, Karakatsanis J. considered the jurisprudential history of civil fraud and observed that requiring the plaintiff to prove inducement was consistent with the Supreme Court’s decision in Parna v. G. & S. Properties Ltd., [1971] S.C.R. 306 and Snell v. Farrell, [1990] 2 S.C.R. 311.

The Supreme Court did not, however, address the line of cases holding the exact opposite: once the elements of fraud are established by the plaintiff, the onus shifts to the defendant to show that the plaintiff was not induced by the false or fraudulent representation. This line of cases is based on the Supreme Court’s decision in Barron v. Kelly (1918), 41 D.L.R. 590 and includes 3Com Corp. v. Zorin International Corp. [2004] O.J. No. 1767;  Siametis et al. v. Trojan Horse (Burlington) Inc., [1979] O.J. No. 3463; Catalyst Pulp and Paper Sales Inc. v. Universal Paper Export Company Ltd., 2009 BCCA 307. It is unusual, to say the least, for the Supreme Court to change the law without addressing contradictory case law.

Further, Karakatsanis J. also did not discuss the element of reliance within the tort of civil fraud, which has been particularly relevant in cases of fraudulent misrepresentation. The tort of deceit (now ‘civil fraud’) and fraudulent misrepresentation have been treated similarly if not the same by Canadian courts. The Supreme Court’s silence  may cause some confusion. Is reliance inducement by another name? The answer is likely yes but the Supreme Court did not address this issue.

Karakatsanis J. also left out one of the traditional elements of the tort of deceit: namely, that “the false representation was made with the intention…”  “to deceive the plaintiff” or “that the plaintiff would act on it” (See for example,  Parna v. G. & S. Properties Ltd., [1971] S.C.R. 306, citing Anson on contract; 3Com Corp. v. Zorin International Corporation, 2006 CanLII 18351 (ON CA); XY, LLC v. Zhu, 2013 BCCA 352). The Supreme Court offered no explanation and did not discuss the issue at all. As a result, it would appear that proof of the intention of the defendant is no longer required, but it is ultimately unclear.

The result

The  Supreme Court upheld the Court of Appeal’s decision and concluded that there was a genuine issue requiring a trial. The third element of the tort was not satisfied: there was no finding by the motion judge that a misrepresentation by Hryniak had induced Bruno to invest. There were also insufficient findings of fact made by the motion judge to conclude that any false statements made by Cranston or Peebles could be attributed to Hryniak; there were no findings that Cranston or Peebles were Hryniak’s agent or unwitting dupe.

Based upon the principles of joint and several liability, Karakatsanis J. determined  that whether some of the Bruno Appliance funds were misappropriated by Cranston, Hryniak, or both was not an issue that would prevent a finding that there is no genuine issue requiring a trial.

The Supreme Court upheld the Court of Appeal’s order that all of the remaining actions be tried together.

Masiel A. Matus
Affleck Greene McMurtry LLP

Masiel A. Matus

Masiel has a broad commercial litigation practice and represents both national and international clients in a variety of complex matters. Masiel has experience litigating cases involving professional negligence, commercial leasing and real property disputes, insurance, contract disputes, shareholder disputes, fraud, breach of fiduciary duty, breach of trust, employment matters and defamation claims.

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