B.

Fraud and Misrepresentation

Sale, Distribution & Transport of Goods - Canadian Forms & Precedents

Sale, Distribution & Transport of Goods - Canadian Forms & Precedents > CHAPTER 2 -
MANUFACTURE AND SALE OF GOODS > Commentary > V. Vitiating Factors

CHAPTER 2 - MANUFACTURE AND SALE OF GOODS

Commentary

V. Vitiating Factors

B. Fraud and Misrepresentation

§ 2.143 The primary obligation lies on a proposed party to a contract to read and interpret the contract document,
and to seek legal counsel if necessary in order to gain an understanding of it. There is no general duty on the other
proposed party to explain the documents to the obligor or identify the nature of the risks to which the obligor will be
exposed if they enter into the transaction. If, however, specific inquiries are made concerning the reason why the
contract is being sought, its more general purpose and the meaning and effect of the document or any passage in
it, then a truthful answer must be given (although in the case of a question calling for the explanation of the whole or
any part of the documentation, it would be sufficient to recommend that the proposed contracting party consult legal
counsel, in lieu of providing any direct answer to the question). While the duty to read the documents falls upon the
obligor, 1 the obligee must not actually engage in a course of conduct that could reasonably be construed as
encouraging the obligor not to read the documents. Similarly, the obligee risks invalidating the contract where it
provides partial or inaccurate advice.2

§ 2.144 A contract is likely to arise after advertisement and promotion of the goods, services or other commodities
to which it relates and following some negotiation between the parties. During these stages in the contracting
process, statements will almost certainly be made by one party to the other concerning the qualities or attributes of
the commodity that forms the subject of the contract. The legal effect of such statements depends upon a range of
considerations. Some of them may become express terms of the contract. Other statements may not form express
terms, but may nevertheless constitute implied terms, taking the form of collateral warranties to the main contract
where the maker of a statement promises the other party that the statement is true. Others may not be seen to form
part of the contract itself, but may still be seen to have induced the party to whom they were made to enter into the
contract. Where a statement made by a party is incorporated into a contract either as an express or an implied
term, the party making that statement will be in breach of contract if the statement is untrue. In other cases, the
situation is less clear. A representation is a statement of fact, express or implied, anterior to the contract, which is
intended to and does induce the person to whom it was made to enter into the contract but is not at the time of its
making intended as a promise, though it may later become incorporated as a term of the contract. Since a
representation is not a promise as such, its falsity cannot constitute a breach of contract. If there is any remedy it
must lie in tort or in statute.3

§ 2.145 The common law has long distinguished among various classes of misinformation which may arise or be
provided during the course of contractual negotiations. A person may, for instance, deliberately mislead another
party; they may state something as a fact with no real belief in whether or not it is true and with reckless disregard
for whether in fact it is true. Alternatively, they may believe that the statement is true, but have made less than
reasonable inquiry in order to determine whether or not it is in fact true. Finally, a person may make such inquiries,
and more, and yet may still state something that is in fact untrue. When dealing with the statement of untruths, the
courts have been primarily concerned with the question of whether or not the person making the statement was
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B. Fraud and Misrepresentation

morally blameworthy when making that statement. The emphasis has begun to shift away from the question of
moral turpitude and more towards the impact of misstatement upon the transaction process. The legal effect of a
non-contractual representation depends upon whether the representation was:
• Mere “puff”: some statements are so outrageous, unsupportable, subjective, whimsical or fanciful that no
reasonable person would be likely to rely upon them. Most statements of this kind involve pure expressions
of personal taste or preference. For instance, a brewer may claim in its advertising that its beer is “the best
beer in the world” without risk of liability, since the assessment of the quality of beer is so subjective that no
reasonable person would rely upon such a statement.
• A statement forming part of the contract. Such statements, if false, constitute a breach of contract, for
which the normal remedies for breach of contract are available. For instance, a warranty included as a term
of the contract that a particular manufacturer makes its beer using only the “purest water from Hamilton
Harbour” gives rise to a claim for breach of contract if that warranty is untrue.
• A statement not forming part of the contract but which was intended and which did induce the person to
whom it was made to enter into the contract. Such statements, if false, give rise to a remedy in the tort of
misrepresentation.

Generally, non-disclosure of facts does not constitute misrepresentation, but it may in certain cases, specifically
where non-disclosure:
• varies or distorts some positive representation; or
• occurred in the context of a special class of contract which requires full and accurate disclosure, as for
instance in the case of an insurance contract, or where there is a fiduciary duty between the parties. Note
that it can be argued that the Consumer Protection Act imposes a duty upon persons dealing with a
consumer in the ordinary course of business to make full and accurate disclosure to consumers, although it
is not entirely clear which this provision does have this effect. A duty of utmost good faith imposes an
obligation to provide relevant information voluntarily, without being asked.

Liability may also arise where the seller remains silent at a time when it is clear that the buyer is acting under a
mistaken impression. In such a case, the silence of the seller is tantamount to a representation that this
misapprehension of fact was correct. Obviously, any information which is provided by a party in the course of
negotiation with the intent that the other party rely upon it must be true. A failure to comply with the duty permits the
person who is entitled to the benefit of it to rescind any contract made. In cases where the duty of utmost good faith
does not apply, the obligation to volunteer information is less clear, and it is often difficult to determine the remedies
that apply.

§ 2.146 Early cases in this area dealt predominantly with the possibility of fraud. Fraud has been defined as a
false statement made knowingly or without belief in its truth or recklessly without care as to whether it is true or
false.4 It has also been defined to mean a false statement that the person who made it did not honestly believe it to
be true at the time when they made it.5 The precise boundaries of civil fraud are not certain, but it is clear that there
is a distinction between incorrect statements of fact that are the result of negligence and fraudulent statements. The
jurisdiction of the court to inquire into the existence of fraud can be excluded by statute,6 but there is a strong
presumption against such an intent,7 and the courts will only consider themselves bound from inquiring into fraud
where clear and explicit language is used.8

§ 2.147 While the statement must be one of fact (meaning either an existing fact or a past event, rather than a
statement of opinion or intent)9 a false statement as to one’s present state of mind is also considered to be a
misstatement of fact sufficient to amount to fraud, if all other requirements of fraud are met.10 Fraud is grounds for
the rescission of a contract.11 Thus, where an oligee obtains a contractual undertaking through fraud,12 the obligor
may avoid liability on the contract.13 It is not necessary for the obligor to show that a particular fraud was material to
his decision to enter the contract.14 Moreover, a person to whom a fraudulent representation has been made may
avoid liability even if they had the opportunity to discover the truth.15 A provision in a contract to the effect that a
party has made its own investigation concerning the subject matter of the contract, and therefore has not relied
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B. Fraud and Misrepresentation

upon representations made by the other party, does not prevent the court from setting aside the contract where that
other party has been guilty of fraud against the party concerned. While a party may absolve himself or herself from
liability for negligent misrepresentation, it is exceedingly doubtful that a contractual provision can remove liability for
fraudulent (i.e. deliberate) misrepresentation.16 Any provision excluding liability for even negligent misrepresentation
will be narrowly construed.17 Although fraud by the obligee or his agent18 will strike to the root of the contract, fraud
by the principal debtor is not sufficient to enable the guarantor to avoid liability,19 unless it can be shown that the
obligee was aware of the fraud,20 was a party to it,21 or is otherwise affixed with responsibility for it. A general
exclusion clause will not override a specific representation on a point of substance which was intended to induce
the making of the agreement unless the intended effect of the exclusion clause can be shown to have been brought
home to the party to whom the representation was made by being specifically drawn to the attention of that party, or
by being specifically acknowledged by that party, or in some other way.22

§ 2.148 At common law, the term “fraud” was confined in scope to deliberate misstatement. In equity, the term had
a wider meaning. Through the concept of “constructive fraud”, equity struck not only at any conduct suggesting an
actual intention to cheat,23 but also where there was a breach of an equitable duty owed by the person making the
representation towards the person to whom that representation was made. As noted above, in Derry v. Peak,24 the
House of Lords fixed the boundaries of the concept of fraud when it held that a statement was fraudulent only if it
was made with knowledge of its falsity or without belief in its truth, or recklessly, without care as to whether it was
true or false. Fraud involves a degree of willful conduct; however, a person may negligently or innocently
misrepresent the facts material to a transaction. Because a finding of fraud is not likely to enhance the business
reputation of an individual, it follows that courts are in general reluctant to make a finding of fraud, it being said in
one case that an allegation of fraud is a serious charge which must be clearly and distinctly pleaded and proved.25
However, where a contracting party is unable to prove that the obligee is guilty of fraud, they may nonetheless be
able to avoid liability by proving misrepresentation, which is a form of misstatement somewhat below a fraud.

§ 2.149 A misrepresentation is no more than a statement of fact that is untrue. Conceptually, therefore,
misrepresentation is broader than fraud, for fraud carries with it a connotation of moral turpitude that
misrepresentation lacks. In contrast, misrepresentation encompasses any non-ambiguous, statement of material
fact,26 made by one party to another27 in the course of the negotiation of a contract or similar arrangement. A mere
misrepresentation may be made negligently (where there is a breach of a duty of care owed to the person to whom
the misrepresentation is made to ensure that the statement is true) or it may be made innocently in the sense that
either no duty of care was owed or reasonable care to confirm the truth of the statement was true. A
misrepresentation may be embodied as an express term of the contract or it may be collateral to the contract.
Where a representation constitutes a term of the contract, the party who made it will generally be guilty of breach of
contract if that representation is found to be untrue.28

§ 2.150 Whether or not they form terms of the contract, all representations made by one party to an another in
order to induce that other party to enter into the contract must fairly and fully present the truth29 in the apparent
sense and meaning conveyed by the terms in which they are expressed.30 Where a misrepresentation does not
constitute a term of the contract, the precise effect of the misrepresentation will vary from case to case. At common
law, misrepresentation and fraud both rendered a contract voidable rather than void.31 A voidable contract cannot
be set aside if the person who was entitled to apply for relief ratifies the contract. Ratification takes place where the
person who has the right of rescission indicates his or her approval or satisfaction with the contract after learning of
the truth. Such an indication may be express or implied. Retention of the consideration given by the other party, or
of the benefits of the contract, combined with an act or statement that evidences an overt expression of approval,
will constitute ratification. Ratification will not be seen to have taken place unless the party ratifying the contract
knew or had notice of all relevant facts.32

Footnote(s)
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B. Fraud and Misrepresentation

1 See, generally, Toronto-Dominion Bank v. 1841246 Ontario Inc. (c.o.b. Tak Mart), [2015] O.J. No. 6863, 2015 ONSC
5401 at paras. 52–60.

2 See, generally, Armstrong Baum Plumbing & Heating v. T.D. Bank, [1994] O.J. No. 331, 15 B.L.R. (2d) 84 at 104
(Gen. Div.), per Wilkins, J., aff’d [1997] O.J. No. 2285, 32 B.L.R. (2d) 230 (C.A.).

3 R. Goode, Commercial Law, 2d ed. (London: Penguin Books, 1995).

4 Derry v. Peek (1889), 14 App. 337; Earl of Stradbroke v. Mitchell (1990), 61 P. & R. 314 at 324-325 (C.A.), per
Gildewell, L.J.:

Fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in
its truth, or (3) recklessly, careless whether it be true or false. ... I think the third is but an instance of the second,
for one who makes the statement under such circumstances can have no real belief in the truth of what he states.
To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this
probably covers the whole ground, for one who knowingly alleges that which is false has obviously no such honest
belief.
5 Angus v. Clifford, [1891] 2 Ch. 449 at 471 (C.A.), per Bowen, L.J.:

... a man is bound to have some honest belief in a statement if he makes it, or whether you treat the matter in the
inverse order, with regard to the necessity of finding at least some recklessness to truth, that is to say some
indifference to the truth which amounts to dishonesty, in either view it seem to me the same result. A man ought to
have a belief that what he is saying is true.
6 See, for instance, Smith v. East Elloe R.D.C., [1956] 1 All E.R. 855 (H.L.).

7 More broadly, in Pyx Granite Co. Ltd. v. Ministry of Housing and Local Government, [1960] A.C. 260 at 286 (H.L.), per
Viscount Simmonds: “It is a principle not by any means to be whittled down that the subject’s recourse to Her Majesty’s
courts for the determination of his rights is not to be excluded except by clear words. This is ... a ‘fundamental’ rule from
which I would not for my part sanction any departure.”
8 Earl of Stradbroke v. Mitchell (1990), 61 P. & C. R. 314 at 324-329 (C.A.) per Gildewell, L.J.

9 Enfield v. London Guarantee Assurance. Co., [1926] S.J. No. 38, 4 D.L.R. 37 at 42 (Sask. C.A.), per Martin, J.A.

10 International Casualty Co. v. Thomson, [1913] S.C.J. No. 23, [1913] 48 S.C.R. 167 (S.C.C.).

11 Newbigging v. Adam (1886), 34 Ch. D. 582 at 592 (C.A.), per Bowen: Fraud does not void a contract but merely
renders it voidable. See also Smith v. Bank of Scotland (1813), 1 Dow 272, 3 E.R. 697 (H.L.).

12 In general, the representation must be made before the contract of guarantee is entered into by the surety: Robinson v.
Ontario New Home Warranty Program, [1994] O.J. No. 915, 18 O.R. (3d) 269 (Ont. Gen. Div.)—misrepresentation to
another party years after the guarantee was given not affecting the validity of the guarantee. However, it is possible that
a misrepresentation made to a person in respect of a guarantee which may be cancelled on notice may prejudice the
creditor’s right to recover for subsequent advances where the effect of that misrepresentation is to convince the surety
not to cancel the guarantee.
13 See, for instance, Willis v. Willis (1850), 17 Sim. 218, 60 E.R. 1112 (V.C.); Railton v. Matthews (1844), 10 C. & F. 934,
8 E.R. 993 (H.L.); Smith v. Bank of Scotland (1813), 1 Dow 272, 3 E.R. 697 (H.L.).
14 Smith v. Kay (1859), 7 H.L.C. 750, 11 E.R. 299 (H.L.)—or, perhaps more accurately, it is not open to the party who
committed an act of fraud to deny the materiality of that fraud. But reliance by the surety on the statement concerned
must still be shown: L.K. Oil & Gas v. Canalands, [1989] A.J. No. 577, 60 D.L.R. (4th) 490 (Alta. C.A.), leave to appeal
refused [1989] S.C.C.A. No. 383.
15 Central Railway of Venezuela v. Kisch (1867), L.R. 2 H.L. 99. So in Redgrave v. Hurd (1881), 20 Ch. D. 1 at 13-14
(C.A.), per Jessell, M.R.” “Nothing can be plainer ... on the authorities in equity than that the effect of false
representation is not got rid of on the ground that the person to whom it was made has been guilty of negligence.”
16 Condominium Plan No. 822 2960 v. 75252 Manitoba Ltd., [1999] A.J. No. 148 at para. 48 (Alta. Q.B.), per Couto, J.;
Mendelssohn v. Normand Ltd., [1970] 1 Q.B. 177 (C.A.), per Lord Denning:
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There are many cases in the books when a man has made, by word of mouth, a promise or a representation of
fact, on which the other party acts by entering into the contract. In all such cases the man is not allowed to
repudiate his representation by reference to a printed condition; ... nor is he allowed to go back on his promise by
reliance on a written clause. ... The reason is because the oral promise or representation has a decisive influence
on the transaction— it is the very thing which induces the other to contract—and it would be most unjust to allow
the maker to go back on it. The printed condition is rejected because it is repugnant to the express oral promise or
representation.
17 See, generally, Bird v. Bicknell, [1987] 2 N.Z.L.R. 542 at 553 (H.C.), per Hillyer, J.; Herbison v. Papakura Video Ltd.,
[1987] 2 N.Z.L.R. 537 (H.C.).

18 Moffatt v. Merchants Bank of Canada, [1885] S.C.J. No. 7, 11 S.C.R. 46 (S.C.C.).

19 J.R. Watkins Medical Co. v. Lee, [1920] 2 W.W.R. 493 (Alta. C.A.); Royal Bank v. Fox, [1973] N.S.J. No. 127, 6
N.S.R. (2d) 684 (C.A.), aff’d [1975] S.C.J. No. 60; Moffatt v. Merchants Bank of Canada, [1885] S.C.J. No. 7, 11
S.C.R. 46 (S.C.C.); see also the lower court decision at: [1884] O.J. No. 100, 5 O.R. 122 (Ont. H.C.J.).
20 Greenfield v. Edwards (1865), 2 D. J. & S. 582, 46 E.R. 501; Mathews v. Bloxsome (1864), 4 New Rep. 139 (Q.B.);
Spencer v. Handley (1842), 4 Man. & G. 414, 134 E.R. 169 (C.P.).

21 Spencer v. Handley (1842), 4 Man. & G. 414, 134 E.R. 169 (C.P.).

22 Zippy Print Enterprises Ltd. v. Pawliuk, [1994] B.C.J. No. 2778 at para. 45 (B.C.C.A.), per Lamber, J.A. See also
2484234 Ontario Inc. v. Hanley Park Developments Inc., [2020] O.J. No. 1875, 2020 ONCA 273, revd 2020 O.J. No.
2041, 2020 ONCA 293.
23 Nocton v. Ashburton, [1914] A.C. 932 at 954 (H.L.); see also Tate v. Williamson (1866), 2 Ch. App. 55.

24 (1889), 14 App. Cas. 337.See also Angus v. Clifford, [1891] 2 Ch. 449.

25 Wallingford v. Mutual Society (1880), 5 App. Cas. 685. In Le Lievre v. Gould, [1893] 1 Q.B. 491, Lord Esher set down a
principle which has often been applied by the courts in dealing with allegations of fraud: “A charge of fraud is such a
terrible thing to bring against a man that it cannot be maintained in any court unless it is shown that he had a wicked
mind.”
26 Or conduct equivalent in the circumstances to such a statement: Curtis v. Chemical Cleaning & Dyeing Co. Ltd., [1951]
1 K.B. 805 at 808-809 (C.A.), per Denning, L.J.

27 Preston v. Coventry & District Cooperative Society Ltd., [1946] 1 All E.R. 694 at 695 (Q.B.), per Humphreys, J.; and see
generally, Graham Battersby, “Equitable Fraud Committed By Third Parties” (1995) 15 Legal Studies 35.

28 Damages may also be available in addition to rescission in such a case: BG Checo Intl. Ltd. v. B.C. Hydro & Power
Authority, [1993] S.C.J. No. 1, [1993] 1 S.C.R. 12, 99 D.L.R. (4th) 477 (S.C.C.); Douez v. Facebook, Inc., [2017]
S.C.J. No. 33, 2017 SCC 33.
29 However, a person is not liable for negligent misrepresentation where he is asked to provide a “ballpark” figure. In such
a case, it is not reasonable for the recipient of information so casually given to place any reliance upon it: See,
generally, Nussbaum v. Rajesky, [1988] O.J. No. 2369, 3 R.P.R. (2d) 108 (Ont. H.C.J.) affd. [1991] O.J. No. 3048, 16
R.P.R. (2d) 78 (Ont. C.A.). Stated another way, if a person is asked to express an honest opinion or to provide his best
estimate as to a particular fact, it is no misrepresentation if that opinion or estimate subsequently proves to be incorrect.
30 New Brunswick & Canada Rlwy. & Land Co. v. Muggeridge (1860), 1 Drew & Sm. 363 at 381, 62 E.R. 418 (Ch.), per
Kindersley, V.C.
31 For innocent misrepresentation, the remedy of rescission is equitable rather than legal: Keen v. Alterra Developments
Ltd., [1993] O.J. No. 2623, 35 R.P.R. (2d) 278 at 283 (Ont. Gen. Div.), per Fedak, J., aff’d [1997] O.J. No. 401 (C.A.):

In equity, it is well settled that an innocent misrepresentation may provide a right of rescission. ... An innocent
misrepresentation is a misleading statement, but that statement does not necessarily relate to a term of the
contract. That is, the misleading statement may merely be an inducement to enter the contract. … At common law,
an innocent misrepresentation will not entitle a party to a rescission like remedy unless the misleading statement
can be regarded as a term of the contract.
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32 Petrie v. Guelph Lumber Co., [1886] S.C.J. No. 1, [1886] 11 S.C.R. 450 (S.C.C.) at 476, per Gwynne J. (again,
providing the relevant facts are known).

End of Document