The fundamental core of a finding of fraud is the moral turpitude of the defendant. We base liability for fraud or deceit upon the idea that to lie or to deceive are morally wrong acts. Such acts, therefore, merit legal sanctions when they result in suffering by the victim. But there are also situations where fraud may be found, despite a lack of intent to deceive. This can occur when there is a relationship creating a fiduciary obligation and the fiduciary acts in an unconscionable way that falls short of an actual intent to deceive. This is known as constructive, or equitable fraud.

Civil Fraud

The usual elements of the common-law cause of action for fraud (deceit), and/or fraudulent misrepresentation are as follows: 

1. a statement by the defendant they know is false or are indifferent as to its accuracy; 
2. the defendant knowing that the statement is false or being indifferent to its truth or falsity; 
3. the defendant having an intent to deceive the plaintiff; 
4. the false statement being material and the plaintiff having been induced to act; and,
5. the plaintiff suffering damage

The moral turpitude elements of a claim founded in fraud are fundamental to liability. The Supreme Court of Canada’s (SCC) judgment in Bruno Appliance and Furniture Inc. v. Hryniak (2014) made this point very clearly. Their analysis followed that of the English House of Lords in Derry v. Peek (1889) which contains a thorough history of the tort of deceit and stated three principles:

1. To sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice;
2. Fraud is proved when it is shown that a false statement has been made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false;
3. If fraud is proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.

More recently, the common law in Canada now also requires that the false statement did, in fact, induce the plaintiff to act and was the cause of their damages.

Constructive Fraud

In the law of equity, constructive fraud means not moral fraud in the usual sense, but rather a breach of the sort of obligation which is enforced by a court because of the special relationship between the parties. The court of equity is, after all, a court of conscience. Fraud in this wider sense refers to actions falling short of deceit but where the court is also of the opinion that it would be unconscientious for the actor to avail himself of their poor behaviour. Fraud in this wider sense can be the basis for equitable relief in an infinite variety of relationships such that the courts have not attempted to define the concept precisely except to reinforce that all kinds of unfair dealing and unconscionable conduct in matters of contract come within its scope

Constructive fraud is not, therefore, a common-law tort, but a doctrine of equity used in the supervision of trustees, trustees de son tort, fiduciaries, and contracting parties. The concept of constructive fraud still requires an element of immorality. However, the moral turpitude of constructive fraud is of a different type than the act of being false with an intent to deceive. Therefore, it exists in those relationships (deemed special) where the concept is used to determine whether the complaint amounts to an unconscionable thing for the fiduciary to do to the person or persons to whom they owe a special duty.

As then Chief Justice McLachlin of the BC Superior Court said of equitable, or constructive, fraud in First City Capital Ltd. v. B.C. Building Corp., constructive fraud can take many forms:

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” of a ground for equitable relief “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.”

If you have a question about civil fraud or similar issues, the highly skilled Toronto corporate lawyers at Milosevic & Associates can help. We can provide you with advice and guidance suited to your unique situation. Call us at 416-916-1387 or contact us online to learn more about how we can help.