The Categories of Fraud Are Not Closed

By David Debenham

Frauds often have a fraudster, a shill assisting the fraudster, and a “mark” who is being deceived.  The role of the shill is to persuade the mark that the scam is real, that there really is money to be won if only if the mark is talented or lucky enough.   Now the shill may be in on the scam, or the shill may also have been deceived by the fraudster and allowed to win nominal amounts by the fraudster, so that the shill can lure friends and family into investing (and losing) to the fraudster far more than the shill has gained.   The innocent shill (“a dupe”) is horrified to learn that they have induced lifelong friends into losing their life savings.  When the fraud unravels, the fraudster pleads sweet innocence—- they did not tell the marks anything false—- all the misrepresentations were made by the dupe, often to his friends, and passed on to others.  Now what?

  Is a mark, who has entered into an agreement with an alleged fraudster’s  corporation, otherwise pre-empted from bringing a claim in  fraud for allegedly fraudulent representations because those allegedly fraudulent misrepresentations were made to a third party?  In such a circumstance, is the only available claim to a plaintiff one of breach of contract against the fraudster’s shell company?  

In Vitacea Company Ltd et al v The Winning Combination Inc. et al[1]  the plaintiffs, TSI Group Ltd. (TSI) and Vitacea Company Ltd. (Vitacea), are the manufacturer and distributor of a product known as “Vitamints” which are vitamin-enriched mints.  They entered into a licensing agreement with the defendant, The Winning Combination Inc. (TWC), a Winnipeg-based company, whereby TWC would distribute Vitamints in Canada.  The defendant, Bukhari, is the CEO of TWC. The motion in question dealt with allegations in the Statement of Claim that Mr. Bukhari and TWC acquired and registered trademarks and domain names in the United States on behalf of Vitacea with respect to Vitamints and then, contrary to the terms of the licensing agreement, sold those rights to a third party, knowing full well that they belonged to the plaintiffs.

“TWC” argued the because the tort of deceit or fraudulent misrepresentation) committed by a defendant against a third party does not create a cause of action in civil fraud for a plaintiff against TWC.   Accordingly, TWC argues that the allegation that it committed a civil fraud against Vitacea based on alleged misrepresentations made to third parties (“Wyeth”) is not supportable at law.  The Supreme Court of Canada has confirmed[2] that in order for a plaintiff to make out the tort of civil fraud, the following four‑part test must be satisfied:

  1. a false representation must be made by the defendant;
  2. some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness);
  3. the false representation caused the plaintiff to act; and
  4. the plaintiff’s actions resulted in a loss.

Some of those cases have struck out claims in fraudulent misrepresentation on the basis that the plaintiff was not the representee of the fraudulent statement made by the defendant.[3] 

The court relied on the case of Destiny Enterprises Canada Ltd. v. Kim,[4]  In Destiny Enterprises, the primary parties were “A-Mart” and E-Mart Food Centre Ltd. (“E-Mart”).  The plaintiffs and defendants in Destiny Enterprises were arm’s length commercial parties whose affairs were governed by contracts between them.  The court found that A-Mart had converted E-Mart’s property when A-Mart purported to sell the grocery store belonging to E-Mart to another party in November 2003.  The court determined that the relevant parties were guilty of equitable fraud in participating in a fraudulent venture and were jointly and severally liable in equitable fraud.  There was no evidence of a fraudulent misrepresentation flowing directly between A-Mart and E-Mart:  The fraudulent conduct that the court addressed as a “matter of conscience” was simply A-Mart’s sale of assets to a third party, with the knowledge that E-Mart was the rightful owner.  The court in that case found that such conduct amounted to “equitable fraud”.  This case makes it abundantly clear that equitable fraud may exist as between commercial parties whose relationship is governed by contract, and does not require a fiduciary duty between the parties.  

In Vitaeca, the court court held that “a court of equity may intervene ‘in circumstances where the retention of an advantage gained by one over another would be unconscionable.”  Where required, it is equity that may address a remedy if, as a result of one party obtaining advantage or gain through conduct, such conduct could be characterized as unconscionable.  In the present case, on facts which are presumed to be true, the conduct alleged in the amended statement of claim on the part of both TWC and Bukhari can be characterized as unconscionable.  It is not clear and obvious that those facts would not sustain a claim in equitable fraud.

We therefore must conclude that fraud must not be looked at through a technical lens. There is fraud, and conduct “equivalent to fraud” or “constructive fraud” or “equitable fraud”.  “Fraud in this wider sense refers to transactions falling short of deceit but where the Court is of the opinion that it is unconscientious for a person to avail himself of the advantage obtained”. Fraud in the “wider sense” is a ground for equitable relief which “is so infinite in its varieties that the Courts have not attempted to define it”, but “all kinds of unfair dealing and unconscionable conduct in matters of contract come within its ken”.[5]  When faced with a technical impediment to a claim in fraud, plead “equitable fraud”, when the categories of misconduct are many, varied, and unbounded by strict lines of demarcation.  Cases in which the dupe acts as the unknowing accomplice of the fraudster fall into this category of fraud.



[1] 2016 MBQB 180 aff’d 2016 MBCA 126

[2] Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8 at para. 21, [2014] 1 S.C.R. 126

[3] See, for example, Bernard v. Godfrey, 2010 ONSC 10 at para. 18, 199 A.C.W.S. (3d) 605Balanyk v. University of Toronto (1999), 1999 CanLII 14918 (ON SC), 1 C.P.R. (4th) 300 at paras. 65-66 (Ont. S.C.J.), and Andersen v. St. Jude Medical Inc., [2002] O.T.C. 53, at paras. 45, 47 (Ont. S.C.J.)

[4] 2014 BCSC 299, 30 B.L.R. (5th) 12. 

[5] Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd., 2002 SCC 19, at para 39 (CanLII)

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David Debenham

David Debenham

David, CPA, CMA, is the co-chair of the Fraud Law Group of the law firm of McMillan LLP