Weilers LLP

What is Civil Fraud?

What is Civil Fraud?

November 28, 2022

By Brian Babcock

Fraud is such an ugly word.

When most of us think about fraud, we think about criminal activity and big headlines on our favorite financial websites.

Although fraud can certainly be a crime, the same term is used in is lawsuits between individuals or corporations to describe improper activity which may stop short of the criminal threshold. Unlike criminal fraud, civil fraud only needs to be proven on a balance of probabilities, not beyond a reasonable doubt.

So, lots of victims of civil fraud pursue lawsuits even where the complexity of the facts, and the difficulty proving intent beyond a reasonable doubt make the Crown reluctant to pursue a criminal case.

Civil fraud is sometimes also referred to as fraudulent misrepresentation or deceit, a quaint British term.

Fraudulent misrepresentation requires:

  • a false representation;
  • made with the knowledge that it is false or without an honest belief in its truth;
  • with the intent that it will be relied upon;
  • which the injured party actually relied upon; and
  • which causes damages.

A false statement made through carelessness may not be fraud where the speaker believes it to be true.

There must be an intent to deceive not simply the intent that the untrue statement be relied upon.

This is one of the difficult factual issues which arises in a lawsuit for civil fraud because proving the opposing party’s state of mind is always a challenge.

Indicators of fraud include:

  • active concealment of the true facts;
  • conduct preventing the discovery of the true facts; and
  • conduct discouraging the discovery of the true facts.

We have written before about concept of vicarious liability by which principles are responsible for the wrongdoing of their agents. Vicarious liability is applied somewhat differently in a civil fraud case because there must be proof that the false statements can be attributed to the principal. Typically, the principal’s defence is that the agent did not have even apparent authority to say the untrue statements. If that is believed, there may be judgment against the agent but not against the deep pocketed principal.

Another factor which makes it difficult to prove a civil fraud is the need to prove the inducement. Although the false statement does not need to be the only incentive for the injured party to have acted, it must be is significant or material element. Courts examine both the subjective and objective aspects of inducement. That means that the injured party must show that they individually were induced and that an ordinary or average person in their shoes would have also been induced making their reliance upon the statement reasonable.

In order to lower or avoid some of these hurdles, some injured parties will attempt to prove negligent misrepresentation rather than fraudulent misrepresentation. In a nutshell, the difference is that negligent misrepresentation may be proven where the speaker is careless or reckless as to the truth of their statement. There is a lot of discussion in case law about just what degree of recklessness is required which is beyond the scope of this article.

It may be important to attempt to prove fraud, because that may make different remedies available through aggravated and punitive damages or equitable remedies such as constructive trusts, a resulting trust, disgorgement of gains, tracing, or an accounting.

Evidentiary rules may also be different in a case involving fraud. In a forthcoming article, we will be looking at a case that discuss the “fraud exception” to solicitor-client privilege. As that case points out, for the exception to apply, it must be a situation a fraud, not merely negligent misrepresentation.

The downside to the injured party of alleging fraud is that historically courts frequently denied costs to a successful injured party who alleges fraud but only proves negligence. In a few cases, defendants have been awarded a portion of their costs where they have successfully defended an allegation of fraud but been found negligent. This rule was developed because of the quasi-criminal connotation of an accusation of fraud and the courts’ wish to discourage them from being loosely made.

At the beginning of your case, when you are investigating the facts and sit down to draft your claim, you must make an important tactical decision about whether or not you have enough evidence of fraud to be able to prove it on a balance of probabilities. If you are unlikely to do so, you should not allege fraud. The difficult cases are where there is some evidence of fraud. In those situations, it is a difficult tactical decision whether to allege fraud or merely negligence. Although negligence is easier to prove, allegations of fraud will also strengthen your case if you can prove them.

The drafting of the statement of claim is not merely a matter of putting names dates and figures into a boilerplate precedent. It requires careful consideration of the facts, the causes of action available, and the desired remedies.

Failing to allege appropriate cause of action in a timely fashion can create limitations problems.

Deciding whether to include an allegation of fraud will change the flavour and tone of your case.

The litigation team at Weilers LLP has the experience and thoughtfulness to give you sound advice from the beginning of your case. If you want advice tailored for your specific case, Weilers LLP maybe the lawyers for you.