Can a Person Be Sued For Making False Statements When Negotiating a Contract?

The Tort of Deceit Occurs When a Person Knowingly or Recklessly Makes False Statements or Omits Details With Intention That Another Person Will Rely On the Misinformation and Indeed the Misinformation Is Relied Upon With Resulting Harm.


Understanding the Tort of Deceit Which Is Also Often Referred to As Fraudulent Misrepresentation or Civil Fraud

Deceit, also known as civil fraud or fraudulent misrepresentation, is a cause of action within the business tort family of case matters.  Although deceit is a cause of action in tort law, deceit is relevant to contract law in that a usual remedy for deceit includes the rescission of the contractual relations within which the deceit occurred.  Typically, when successfully argued that but for the deceit, the Plaintiff would have avoided the contract with the Defendant, the contract becomes void at the option of the Plaintiff.

The Law
Required Elements

The elements requiring proof in a case alleging the tort of deceit, of which there are five, were clearly defined within the cases of Rana et al v. Ramzan et al, 2023 ONSC 5792, and Midland Resources Holding Limited v. Shtaif, 2017 ONCA 320, wherein each it was stated:


[27]  The required elements of the intentional torts of civil fraud and deceit were outlined by the Supreme Court of Canada in Hryniak as: (1) a false representation made by the defendant; (2) some level of knowledge of the falsehood by the defendant or recklessness in making the representation; (3) the false representation caused the plaintiff to act; and (4) the plaintiff’s actions resulted in a loss: Hryniak, at para. 21.

[28]  Although the plaintiffs assert two distinct causes of action namely under the intentional torts of fraud and deceit, the academic literature and jurisprudence after Hryniak demonstrates that deceit, fraud, and fraudulent misrepresentation are used interchangeably and that the constituent elements of these intentional torts are the same as set out in that decision: Peek v. Derry (1889), L. R. 14 App. Cas. 337 (U.K. H.L.); Paulus v. Fleury, 2018 ONCA 1072, 144 O.R. (3d) 791, at para. 8Soil Engineers Ltd v. Anthony Upper, 2020 ONSC 7495, at para. 8Battrum v. MacKenzie Estate, 2010 BCSC 1285, at para. 33.

[29]  Post-Hryniak, there has been some controversy as to whether proof of intent on the part of the defendant is a necessary requirement in order to make out a case in civil fraud: see Precision Drilling Canada Limited Partnership v. Yangarra Resources Ltd., 2017 ABCA 378, 60 Alta. L.R. (6th) 57, at paras. 29 – 30.

[30]  In Paulus, the trial judge had used the four-part list of constituent elements of the intentional tort of fraud from Hryniak. However Pardu J.A., for the court, adopted the test established by Brown J.A. in Midland Resources and stated the following at paras. 8 and 9 of the decision:

8  As the defendant's allegation of civil fraud was central to the motion judge's decision, I begin by noting that courts have used the same test for civil fraud as they have for the torts of deceit and fraudulent misrepresentation: see e.g. Deposit Insurance Corp. of Ontario v. Malette, 2014 ONSC 2845 (Ont. S.C.J.), at para. 19Amertek Inc. v. Canadian Commercial Corp. (2005), 2005 CanLII 23220 (ON CA), 76 O.R. (3d) 241 (Ont. C.A.), at para. 63, leave to appeal refused, [2005] S.C.C.A. No. 439 (S.C.C.); and Midland Resources Holding Ltd. v. Shtaif, 2017 ONCA 320, 135 O.R. (3d) 481 (Ont. C.A.), at para. 162, leave to appeal refused, [2017] S.C.C.A. No. 246 (S.C.C.).

9  For the purposes of this appeal, I adopt Brown J.A.'s articulation of this test in Midland Resources Holding Ltd., at para. 162. The five elements of the test are as follows:

(i) a false representation of fact by the defendant to the plaintiff; (ii) knowledge the representation was false, absence of belief in its truth, or recklessness as to its truth; (iii) an intention the plaintiff act in reliance on the representation; (iv) the plaintiff acts on the representation; and (v) the plaintiff suffers a loss in doing so. [Citations omitted.]

[31]  Pardu J.A. expressly concluded that intent was a required element of the tort of civil fraud although this was not expressly stated in Hryniak. Leave to appeal to the Supreme Court of Canada in Paulus was denied.

[32]  Therefore, the test established in Hryniak implicitly includes a requirement that the plaintiff prove intent on the part of the defendant making the false statement or representation, as was accepted by the Court of Appeal in Midland Resources at para. 162. See also: NEP Canada ULC v. MEC OP LLC, 2021 ABQB 180, at para. 783.


[162]  Fraudulent misrepresentation is established where there are the following five elements: (i) a false representation of fact by the defendant to the plaintiff; (ii) knowledge the representation was false, absence of belief in its truth, or recklessness as to its truth; (iii) an intention the plaintiff act in reliance on the representation; (iv) the plaintiff acts on the representation; and (v) the plaintiff suffers a loss in doing so: Amertek Inc. v. Canadian Commercial Corp. (2005), 2005 CanLII 23220 (ON CA), 76 O.R. (3d) 241, [2005] O.J. No. 2789 (C.A.), at para. 63, leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 439.

[163] A misrepresentation can involve not only an overt statement of fact, but also certain kinds of silence: the half-truth or representation that is practically false, not because of what is said, but because of what is left unsaid; or where the circumstances raise a duty on the representor to state certain matters, if they exist, and where the representee is entitled, as against the representor, to infer their non-existence from the representor's silence as to them: Robert Van Kessel and Paul Rand, The Law of Fraud in Canada (Toronto: LexisNexis, 2013), at 2.69 and 2.72.

Third Party Within Deceit Cases

Furthermore, and while deceit is usually claimed against the person with whom dealings were directly engaged, the tort of deceit may also be alleged against a third party as a person without contractual relations with the Plaintiff; but instead, it was the third person who made false statements that were relied upon by the Plaintiff during business dealings or some form of transaction.  This third party deceit situation occurred within the case of Pasley v. Freeman (1789), 100 E.R. 450, which was referenced and cited within the Ontario cases of Rana et al v. Ramzan et al, and Toronto-Dominion Bank v. Mapleleaf Furniture Manufacturing Ltd., 2003 CanLII 22203, wherein each it was respectively said:


[16]  A third-party to a contractual relationship may be liable in fraud or deceit for a loss sustained by one of the contracting parties if that non-party knowingly made false statements that induced the representee to enter into the contract: Pasley v. Freeman (1789) 100 E. R. 450; Toronto-Dominion Bank v. Mapleleaf Furniture Manufacturing Ltd., 2003 CanLII 22203 (Ont. S.C.J.).


[86]  Quite apart from the allegations of conspiracy and the allegations of “knowing assistance” of the fraud of the DeLucas, the Pastore defendants are liable to the plaintiff by virtue of their having acting in ways constituting the tort of deceit, which is sometimes referred to as fraud or fraudulent misrepresentation.  In that regard I adopt the following statements from Klar: Tort Law (3d ed.), 2003, Thomson Canada Limited:

At pp.599-600:

Deceit, as an independent tort, must be distinguished from deceitful or fraudulent conduct, as a type of dishonest behaviour.  Its existence as an independent tort, not linked to a contractual relationship between two parties, was confirmed in the case of Pasley v. Freeman.  This case decided that an individual could be held liable for a fraudulent misrepresentation made by that person to another, even though the representor had no direct interest in the matter at hand, nor was in collusion with the party who had an interest.  The tort is based on a false representation made by one person to another, knowingly, whereby damage is caused to the other.  (2.(1789) 100 E.R.)

At pp.600-1:

To succeed in deceit, a plaintiff must prove that (1) a false representation or statement was made by the defendant, (2) which was knowingly false, (3) was made with the intention to deceive the plaintiff, and (4) which materially induced the plaintiff to act, resulting in damage.

Blaming the Victim for Naivete

Occasionally in deceit cases, the Defendant will attempt to defend the case on the basis that the Plaintiff was excessively naive or failed to investigate the truth of the statements and thus failed to uncover the deceit.  Thankfully, the law is unwilling to allow liars to avoid accountability by pointing fingers at the innocent as generally both contributory negligence and the foreseeability test are inapplicable in intentional tort matters.  Such was well articulated by the great tort law scholar, Lewis Klar:


Normally, intentional trespasses are considered to be the most serious breaches, deserving the harshest of sanctions.  Courts, for example, traditionally have refused to permit defendants liable for an intentional trespass to plead contributory negligence and have not limited the damages recoverable against them by the reasonable foreseeability test. 


It has been held that a fraudulent defendant cannot defend the action on the grounds that the plaintiff was unwise in acting upon the representation, or had the opportunity, which was not taken up, of verifying the information.

Further to the views of Klar, the inability of a Defendant to blame a Plaintiff for failing to investigate and confirm that the falsity of the information or to blame a Plaintiff for being naive, was well explained within Rana et al v. Ramzan et al, as well as United Services Fund (Trustees of) v. Richardson Greenshields, 1988 CanLII 2955, whereas in each it was respectively stated:


[22]  Contributory negligence arguably connected with the plaintiff’s failure to investigate representations which would have disclosed the fraud, is not available as a defence to a party who may otherwise be liable for fraudulent statements or representations that induced the plaintiff to enter into a commercial arrangement or contract: Vidcom Communications Ltd. v Rattan, 2022 BCSC 522, at para. 54; Wen v. Gu, 2021 ONCA 259.

...

[33]  Although due diligence is not required of a plaintiff and contributory negligence is not an available defence in a fraud action, once a plaintiff knows of a fraud, they must mitigate their loss: Performance Industries Ltd. v. Silvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, at para. 70.


[56]   Carelessness on the part of the victim has never been a defence to an action for fraud.  As Lord Chelmsford said in Central Ry.  Co.  of Venezuela (Dir., etc.) v. Kisch (1867), L.R.  2 H.L.  99 at 120-21:

But it appears to me that when once it is established that there has been any fraudulent misrepresentation or wilful concealment by which a person has been induced to enter into a contract, it is no answer to his claim to be relieved from it to tell him that he might have known the truth by proper inquiry.  He has a right to retort upon his objector, "You, at least, who have stated what is untrue, or have concealed the truth, for the purpose of drawing me into a contract, cannot accuse me of want of caution because I relied implicitly upon your fairness and honesty." I quite agree with the opinion of Lord Lyndhurst, in the case of Small v. Attwood 6 Cl.  & F.  395, that "where representations are made with respect to the nature and character of property which is to become the subject of purchase, affecting the value of that property, and those representations afterwards turn out to be incorrect and false, to the knowledge of the party making them, a foundation is laid for maintaining an action in a Court of common law to recover damages for the deceit so practised; and in a Court of equity a foundation is laid for setting aside the contract which was founded upon that basis." And in the case of Dobell v. Stevens 3 B.  & C.  623, to which he refers as an authority in support of the proposition, which was an action for deceit in falsely representing the amount of the business done in a public house, the purchaser was held to be entitled to recover damages, although the books were in the house, and he might have had access to them if he thought proper.

.....

[62] It is not difficult to grasp that in an action for negligence, want of reasonable care for one's own safety may go to both.  Take the case of a man knocked down by a motor vehicle.  The collision may have been caused by his running across the street and by the driver failing to keep a proper lookout.  If after the accident the plaintiff fails to obtain appropriate medical treatment and then suffers greater permanent injury than he might have, the defendant may raise that failure.  But whether that is fault contributing to the loss within the Negligence Act or merely a breach of the duty to mitigate is a nice question.  I do not propose to decide it.

[63] But I cannot see how that concept arises in fraud.  Once the plaintiff knows of the fraud, he must mitigate his loss but, until he knows of it, in my view, no issue of reasonable care or anything resembling it arises at law.

[64] And, in my opinion, a good thing, too.  There may be greater dangers to civilized society than endemic dishonesty.  But I can think of nothing which will contribute to dishonesty more than a rule of law which requires us all to be on perpetual guard against rogues lest we be faced with a defence of "Ha, ha, your own fault, I fool you".  Such a defence should not be countenanced from a rogue.

This principle was also well said by the Court of Appeal within the recent case of Wen v. Gu, 2021 ONCA 259, while citing the Supreme Court in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd.[2002] 1 S.C.R. 678, as well as the earlier decision of the Court of Appeal in Man Financial Canada Co. v. Keuroghlian, 2008 ONCA 592, whereas it was said:


[12]  Second, the trial judge erred by assigning responsibility to the appellant. He should not have relied upon the appellant’s lack of due diligence to find that there was no fraudulent misrepresentation: Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, [2002] 1 S.C.R. 678, at paras. 67-69; Man Financial Canada Co. v. Keuroghlian, 2008 ONCA 592, at para. 45.

Summary Comment

Deceit, as is also known as fraudulent misrepresentation, involves a false statement, that was known as false, that is relied upon by a person who suffers harm as a result of false statement.  The falsity of the statement must be known at the time that the statement was made rather than a statement that was made and subsequently became false.  The knowledge of falseity can arise constructively where a statement is made recklessly without due regard for truth.  Additionally, the victim of the deceit is without contributory negligence should the victim reasonably rely on the false statement without first confirming the truth as the law disallows those who utter false statements from blaming the victim for being naive.

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