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Pleadings - Amendment

Corporations - Directors - Fiduciary Duty

Torts - Fraudulent Misrepresentation - Elements

Pleadings - Fraud - Particulars

Torts - Fraud - Pleadings - Particulars

Midland Resources Holding Limited v. Shtaif (Ont CA, 2017)

In this wide-ranging commercial litigation case the Court of Appeal canvassed a number of issues.

Firstly, it considered the conditions under which unpled causes of action may nonetheless be argued and considered by the court:
[109] Rule 25.07(4) of the Rules of Civil Procedure requires a defendant to plead any matter on which he intends to rely to defeat the claim of the opposite party and which, if not specifically pleaded, "might take the opposite party by surprise or raise an issue that has not been raised in the opposite party's pleading." This requires a party to plead an affirmative defence, such as a plaintiff's lack of standing to sue: Concord Kitchens GP Inc. v. Eastern Construction Company Limited, 2010 ONSC 2168 (CanLII), at paras. 102-105; Huber v. Way, 2014 ONSC 4426 (CanLII), at paras. 66-68.

[110] The reason for this pleading rule is quite simple. The just determination of a civil proceeding on its merits requires a fair adjudicative process. Trial by ambush is not fair. Accordingly, trial unfairness may result where a defendant is permitted to rely on an unpleaded defence which, if pleaded, might have prompted counsel to employ different tactics at trial: Strong v. Paquet Estate (2000), 2000 CanLII 16831 (ON CA), 50 O.R. (3d) 70 (C.A.), leave to appeal refused, [2000] S.C.C.A. No. 532, at para. 37. As this court stated in Hav-A-Kar Leasing, 2012 ONCA 826 (CanLII), at paras. 69-70:
The failure to raise substantive responses to a plaintiff’s claims until trial or, worse, until the close of trial, is contrary to the spirit and requirements of the Rules of Civil Procedure and the goal of fair contest that underlies those Rules. Such a failure also undermines the important principle that the parties to a civil lawsuit are entitled to have their differences resolved on the basis of the issues joined in the pleadings…. [W]here a defence to a civil action is not pleaded and no pleadings amendment is obtained, judges should generally resist the inclination to allow a defendant to raise and rely on the unpleaded defence if trial fairness and the avoidance of prejudice to the plaintiff are to be achieved.
[111] The rule is not absolute. This court has excused defendants from their failure to raise an affirmative defence in the pleadings where the issue was otherwise clearly raised and put in issue before trial: Reliable Life Insurance Company v. M.H. Ingle & Associates Insurance Brokers Ltd. (2002), 2002 CanLII 41603 (ON CA), 59 O.R. (3d) 1 (C.A.), at para. 36. However, raising a potentially dispositive issue during closing submissions, after the close of evidence, may well prove too late.
On the issue of a director's fiduciary duty to a corporation, the court stated:
[148] Directors must serve the corporation selflessly, honestly, loyally, and in good faith; they must avoid abusing their position to gain personal benefit: Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 (CanLII), [2004] 3 S.C.R. 461, at para. 35. These fiduciary duties flow from the trust and confidence shareholders repose in the directors to manage the corporation’s assets, including those transferred to the corporation by the shareholders: Peoples, at paras. 34-35.

[149] As a result, a director owes a corporation a fiduciary duty to act honestly, which includes a duty to disclose material information: see, generally, Kevin P. McGuinness, Canadian Business Corporations Law, 2d ed. (Markham, Ontario: LexisNexis Canada Inc., 2007), at §11.40; 484887 Alberta Inc. v. Faraci, 2002 ABQB 406 (CanLII), 311 A.R. 355, at para. 28, citing Jackson v. Trimac Limited, 1994 ABCA 199 (CanLII), 20 Alta. L.R. (3d) 117, at p. 5.

.....

[156] Directors owe their fiduciary obligation to the corporation: Peoples, at para. 43; BCE, at para. 66. And, in BCE, the Supreme Court of Canada noted that “[n]ormally only the beneficiary of a fiduciary duty can enforce the duty”: para. 41. The court acknowledged this could work a harsh result because “the directors who control the corporation are unlikely to bring an action against themselves for breach of their own fiduciary duty”: para. 41. However, in light of the availability of several other remedies to shareholders – such as the oppression remedy, a derivative action, or an action based on a director’s duty of care – the Supreme Court has resisted characterizing corporate stakeholders as the beneficiaries of directors’ statutory fiduciary duties: Peoples, at para. 53; BCE, at paras. 42-45.

[157] That said, a director may owe an ad hoc fiduciary duty to a shareholder, especially in “situations involving a family or other close special relationships of trust and dependency between the claimant and the defendant director, in which the director was seeking to take advantage of that relationship for personal gain or profit”: Kevin McGuinness, Canadian Business Corporations Law, Second Edition, at §11.194; Harris v. Leikin Group Inc., 2013 ONSC 1525 (CanLII), at para. 401-2; affirmed 2014 ONCA 479 (CanLII). However, although the respondents pleaded the existence of an ad hoc fiduciary duty owed by Roberts to Shnaider and Shyfrin, the trial judge made no factual findings that such a duty arose in the circumstances.
And on the elements of the tort of fraudulent misrepresentation, particularly in the face of silence by the defendant, the court stated:
[162] Fraudulent misrepresentation is established where there are the following five elements: (i) a false representation of fact by the defendant to the plaintiff; (ii) knowledge the representation was false, absence of belief in its truth, or recklessness as to its truth; (iii) an intention the plaintiff act in reliance on the representation; (iv) the plaintiff acts on the representation; and (v) the plaintiff suffers a loss in doing so: Amertek Inc. v. Canadian Commercial Corp. (2005), 2005 CanLII 23220 (ON CA), 76 O.R. (3d) 241 (C.A.), at para. 63, leave to appeal refused, [2005] S.C.C.A. No. 439.

[163] A misrepresentation can involve not only an overt statement of fact, but also certain kinds of silence: the half-truth or representation that is practically false, not because of what is said, but because of what is left unsaid; or where the circumstances raise a duty on the representor to state certain matters, if they exist, and where the representee is entitled, as against the representor, to infer their non-existence from the representor’s silence as to them: Robert van Kessel & Paul Rand, The Law of Fraud in Canada (Toronto: LexisNexis Canada Inc., 2013), at §2.69 and 2.72.

[164] The significance of silence always falls to be considered in the context in which it occurs: Demagogue Pty. Ltd. v. Ramensky (1992), 39 F.C.R. 31 (Austral. F.C.), at p. 32. As explained by Professor Waddams: “Almost always something is said to induce the transaction and it is open to the court to hold that the concealment of the material facts can, when taken with general statements, true in themselves but incomplete, turn those statements into misrepresentations”: S.M. Waddams, The Law of Contracts, 6th ed. (Toronto: Canada Law Book Inc., 2010), at para. 439.
On the particularity of pleadings required to allege fraud, the court added:
[198] First, precision and particularity are necessary when pleading fraud. Rule 25.06(8) of the Rules of Civil Procedure requires any pleading of fraud or misrepresentation to contain “full particulars”. In Hamilton v. 1214125 Ontario Ltd., 2009 ONCA 684 (CanLII), 84 R.P.R. (4th) 25, this court identified, at para. 35, the necessary elements for a plea of deceit:
The pleading, even of innocent misrepresentation, must set out with careful particularity the elements of the misrepresentation relied upon, that is:

1. the alleged misrepresentation itself,

2. when, where, how, by whom and to whom it was made,

3. its falsity,

4. the inducement,

5. the intention that the plaintiff should rely upon it,

6. the alteration by the plaintiff of his or her position relying on the misrepresentation,

7. the resulting loss or damage to the plaintiff.

Of course, if deceit is alleged, then there must also be an allegation that the defendant knew of the falsity of his statement…. Each of the defendants must know the case that it has to meet.


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