Canada: Canada: Documents Prove Fraud In Summary Judgment Decision

Last Updated: November 27 2017
Article by Brendan O'Grady

Summary judgment of an action may only be granted when there is no genuine issue requiring a trial and this can be difficult to prove in fraud cases where credibility is often an important factor. In the recent Ontario Superior Court decision in MacNamara v. 2087850 Ontario Ltd. (Strathcona Construction), 2017 ONSC 499, Justice Akbarali granted summary judgment finding both fraud and grounds to pierce the corporate veil of a corporate defendant. This case demonstrates how liability for even the most serious causes of action can be established by way of summary judgment where a full evidentiary record allows the Court to find the necessary facts, apply the law, and determine that there is no genuine issue for trial.

Background of the Case

The Plaintiff retained the Defendants to renovate his property. The Defendants consisted of a general contractor, 2087850 Ontario Ltd. o/a Strathcona Construction ("Strathcona"), its sole shareholder, officer and director, Robert Koblinsky, and a sub-contractor, Richard Morris. The renovation stretched on for over two years at a cost of over $6 million. When the Plaintiff became concerned with excess costs, he hired an investigator who uncovered a fraudulent invoicing scheme. The Plaintiff then fired the Defendants, and brought an action for civil fraud and seeking a finding of personal liability against Koblinsky.

The Plaintiff moved for summary judgment instead of seeking a trial. Both parties filed extensive affidavit evidence and conducted cross-examinations. The Court was satisfied that the evidence, largely documentary in nature, was sufficient to render a summary judgment. The record disclosed both parties' attestations on the arrangements between them, the investigator's findings on invoicing irregularities, and the quantity of loss suffered.

The Fraud

The Court held that, although the parties never executed a written contract, a binding oral arrangement provided that Strathcona could charge a 25% mark-up. Both parties had adduced evidence of the 25% mark-up, which the Plaintiff did not challenge. The Court rejected the Defendants' self-contradictory argument that its services were performed on an ad hoc basis and that Strathcona was at liberty to charge "whatever it felt like". The Court found that this suggestion "defied common sense", given the significant "scope and value" of the renovation project.

Relying on the investigator's factual evidence, the Court found numerous kinds of irregularities in Strathcona's invoices, including: (i) inflated charges for sub-trade accounts; (ii) double-charging of HST; (iii) failure to pass-on discounts; (iv) charging for amounts paid by other parties; and (v) charging for sub-trades without back-up documentation. One example involved a sub-contractor who quoted a flat fee of $10,000 but was never retained, and yet Strathcona charged the Plaintiff $12,500 (i.e. $10,000 plus a 25% mark-up). Another example involved a subcontractor who charged around $535,000, with Strathcona passing on a charge of around $728,000 plus its 25% mark-up and HST.

These and similar examples of irregular invoicing were sufficient to establish civil fraud, which requires:

  1. a false representation by the defendant (the misstatements in the invoices);
  2. knowledge of, or recklessness as to, the falsehood of the representation on the part of the defendant (Strathcona's knowledge of what the sub-contractors had charged, what it was charging the Plaintiff, how mark-ups were limited to 25%, and how it had no basis to charge in the manner that it did);
  3. the false representation caused the plaintiff to act (the false invoices induced the Plaintiff to overpay); and
  4. the plaintiff's actions resulted in a loss (the Plaintiff overpaid).

Ultimately, the Court was "satisfied that this false invoicing scheme amounted to fraud. This was not a case of isolated errors in the invoicing, but a persistent scheme to overcharge [the Plaintiff] and conceal the overcharging by failing to provide the back-up documentation to Strathcona's invoices." The Court awarded the Plaintiff damages of $1,387,902.

Personal Liability for the Fraud

The Plaintiff sought a finding of personal liability against the sole shareholder of Strathcona. The Court held that "this is one of the rare cases in which piercing the corporate veil is warranted, because [the shareholder] exercised complete control over Strathcona and employed Strathcona as an instrument of fraud."

It is settled law that Courts will disregard the separate legal personality of a corporate entity where it is "completely dominated and controlled" by, and being used as "a shield for fraudulent or improper conduct" by, an individual. The Court found these conditions were satisfied because the sole shareholder was also the sole director and officer, who personally reviewed all sub-trade charges, and prepared or oversaw all invoices to the Plaintiff. He therefore "exercised his control to allow Strathcona to be used for a fraudulent or improper purpose".

On October 16, 2017, the Court of Appeal dismissed an appeal in MacNamara v. 2087850 Ontario Ltd., 2017 ONCA 813.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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