Fraudulent misrepresentation

How BC law treats it

The Supreme Court of Canada set out the elements of civil fraud in Bruno Appliance and Furniture, Inc v Hryniak, 2014 SCC 8: a false representation by the defendant; some level of knowledge of its falsehood, meaning knowledge or recklessness; the representation caused the plaintiff to act; and the plaintiff's actions resulted in a loss. Fraud must be proved on the balance of probabilities with clear, convincing and cogent evidence, as in any civil case. A misrepresentation can be made by words, conduct, a half-truth or active concealment. Silence alone is usually not enough unless there is a duty to speak, but correcting a statement that has become untrue is required. Individuals who make the fraudulent statement, including directors and officers acting for a company, can be personally liable. Remedies include damages in deceit, which cover all losses flowing directly from the fraud, and rescission of the contract, which restores the parties to their prior positions where that is still possible. Punitive damages may be available for high-handed conduct. Contractual protections usually do not help a party who committed fraud: courts generally will not let an entire agreement clause or exclusion clause shield fraud. Under the Limitation Act, SBC 2012, c 13, a claim must generally be started within two years after the plaintiff discovered, or reasonably ought to have discovered, the claim (ss. 6 and 8). The 15 year ultimate limitation period does not run while the defendant wilfully conceals the claim (s. 21). Fraud is also a criminal offence under section 380 of the Criminal Code, but the civil claim proceeds separately.

What it means for your business

Fraudulent misrepresentation claims arise often in share and asset purchases, investment pitches, and franchise and supply deals. A buyer misled about revenue, liabilities or customers may recover all its losses or unwind the deal, and a seller cannot rely on its disclaimers. For founders and executives, personal liability for statements made on behalf of a company is a real risk. Accurate disclosure, careful representations and warranties, and records of what was said protect both sides. Example: A buyer purchases a Coquitlam landscaping company after the seller presents doctored financial statements showing a major contract that had already been cancelled. The buyer sues the seller personally in deceit and recovers the overpayment despite the agreement's entire agreement clause.

Risks and common mistakes

Pleading fraud without specific facts, which can lead to the claim being struck and to special costs. Waiting more than two years after discovering the deception to start a claim. Assuming an entire agreement clause will protect a seller who knowingly misled the buyer. Delaying a decision to rescind, which can lose the right to unwind the contract. Confusing fraudulent misrepresentation with negligent or innocent misrepresentation, which have different remedies.