February 24, 2023
It must take a particular kind of bravery to execute a multimillion-dollar fraud against the government.
That same foolish bravery may then lead the fraudster to try to defend an action by the government to recover the money on the basis that it is really the government’s fault for not preventing him from committing the fraud, relying on the principle of contributory negligence.
THE ISSUE
Is this truly brave or is it just foolish?
Is being a victim of fraud just like wearing shoes with no treads on an icy sidewalk?
THE CASE
It is certainly an unusual enough argument that the Court of Appeal had to review it in the case of Ontario v. Madan.
In Madan, the fraudster was an employee of the government who exploited vulnerabilities in systems he himself was in charge of. Recognizing that no system can ever be perfect, allowing him to claim that the system could have been designed better would simply encourage smarter fraudsters in the future.
The court saw this clearly:
[19] The proposition that a fraudster’s liability for damages flowing from its fraud should be reduced to reflect a victim’s failure to protect itself from the fraud would, if accepted, strongly suggest that if perpetrated against the right victim, crime would indeed pay. Thankfully the law is to the contrary. As the motion judge held, a victim’s negligence or carelessness affords no defence, partial or otherwise, to an allegation of dishonesty (citations omitted).
But what about Ontario’s claims that Madan’s family members who received monies were unjustly enriched? Could a defence of contributory negligence apply there, wrapped up in allegations that the Province lacked the “clean hands” [1] required for the equitable remedy of unjust enrichment?
The court does not buy that:
[22] The appellants’ position is untenable in law. I am unaware of any case which suggests that a plaintiff’s carelessness or negligent conduct can demonstrate the kind of moral turpitude required to justify invoking the “clean hands” doctrine to deny what would otherwise be appropriate equitable relief based on unjust enrichment.
…
[25] Apart from the state of the case law, the appellants’ claim fails on a first principles analysis. The appellants maintain that even if they are in possession of assets that are the indirect proceeds of the frauds perpetrated against Ontario, and even though the appellants have no legitimate claim to any part of the proceeds of those frauds, they should be entitled to keep the assets, or at least part of the assets, which are the indirect proceeds of the fraud, presumably to “punish” Ontario for not taking adequate steps to protect itself from the fraud.
[26] On this approach, the appellants become the beneficiaries of what can only be described as a windfall, occasioned by Ontario’s failure to protect itself from Sanjay’s fraud. I am unaware of any equitable principle which justifies this result. Indeed, the result, a permanent financial loss for Ontario, the victim of the fraud, and a windfall gain for the appellants, bystanders to the fraud, seems the antithesis of equity.
The result is that we can now say with confidence that advancing a defence of contributory negligence in the face of your own dishonesty is foolish. We have commented previously about how courts dislike dishonesty and will do everything that they can to discourage it.
TAKEAWAYS
- This is very good news for victims of fraud.
- Just as fraudsters are often clever about their frauds, they can be clever about hiding the money.
- This case will likely make it simpler and quicker to recover judgment which is usually just the first step in trying to track down and recover some of your money.
- In addition to a judgment for damages, remedies such as a constructive trust, an accounting, a tracing order, or a Mareva injunction can all assist the recovery process, but none come with a guarantee of success and all cost money.
- Anything that the courts can do to make this process quicker, simpler, and cheaper is good news.
HOW WEILERS LLP CAN HELP YOU
We hope that you are never a victim of fraud. If you are, among the things that this case tells us is that you should not be embarrassed about it. Fraud happens. No amount of careful planning can defeat the best fraudsters. What we can do is work with you and your advisers to attempt to recover, whether under an insurance policy or by obtaining judgment against the wrongdoers or people to whom they paid the money. This requires knowledge of both the law and equity, which is a strength of the Weilers LLP team.
If you are a victim of fraud, feel free to give us a call and discuss whether Weilers LLP may be the right lawyers to help you.
[1] The “clean hands” principle may be explained in more detail in a future article. For purposes of this article, the court’s explanation will do. If you want to know more, contact us.