In the summer of 2024, Baker McKenzie obtained a trial judgment in fraud in CHU De Québec-Université Laval v. Tree of Knowledge International Corp. This decision provides clarity on the application of the “recklessness” standard in civil fraud claims. It also explains when a court will affix personal liability for the conduct of a corporate officer and director.
CHU de Québec is one of the largest hospital networks in the country and, like many other health care institutions, it faced serious shortages of personal protective equipment during the pandemic. The defendants, Tree of Knowledge International Corp. and its wholly-owned US subsidiary, contracted to supply 3 million NIOSH certified N95 masks, for approximately US $14 million. The defendants’ officer and director, Michael Caridi, represented that Tree of Knowledge could supply the required masks in two days if the full purchase price was paid in advance. The purchase price was then paid, but the masks were not delivered and instead Mr. Caridi tried to justify the delivery of a smaller quantity of KN95 masks. CHU de Québec refused to accept the KN95 masks and demanded repayment in full.
CHU de Québec sued in Ontario and obtained a Mareva injunction in December 2020. Thereafter, all of defendants settled, other than Mr. Caridi, who maintained that there was an oral agreement to deliver masks that were “of equivalent quality” to NIOSH Certified N95 Masks, despite the wording in the contract to the contrary. At trial, Mr. Caridi reversed his position, and argued that he did not fully appreciate the difference between N95 and KN95 masks at the time he represented that the specialized masks could be delivered.
The test for civil fraud was as set out in Bruno Appliance and Furniture Inc. v. Hryniak. Among other things, fraud requires some level of knowledge of the falsehood of the representation by the defendant, whether through actual knowledge or reckless disregard for the truth. The Court clarified that references to “carelessness” in foundational fraud cases, such as Derry v. Peek (1989), 14 App. Cas. 337 refer to parties “being indifferent or not caring about whether the statement being made is true”, as opposed to making a statement “without taking care”.
This case involved a familiar fact pattern: a party makes a representation or promise hoping that it is true but without having devoted meaningful effort to verifying its accuracy. In this case the trial judge found that Mr. Caridi understood there was a risk that he could not deliver the specific masks he was promising, and disregarded this possibility in circumstances where the full risk was then placed on the counter-party in the transaction. He did not care whether his representation was true or false, which amounts to recklessness/carelessness under the law of civil fraud.
Mr. Caridi was acting in his capacity as officer and director of the corporate defendants, and as such the Court needed to then determine whether he could be held personally liable for his fraudulent misrepresentation. Looking to cases such as ADGA Systems International Ltd. v. Valcom Ltd. and more recently Crowder v. Canada Builds Company, the question is whether the actions of the corporate representative are tortious in and of themselves or exhibit a separate identity from the corporation. Typically, this comes up in cases involving breach of contract or tortious conduct causing physical injury or property damages, but the principle also extends to torts involving economic loss such as deceit or fraudulent misrepresentation. At trial, the evidence was that Mr. Caridi stood to personally profit from the misrepresentation (he admitted that he was to share 50% of the profits with the corporate defendants) and he had directed the proceeds to a bank account of the wholly-owned US subsidiary that he controlled. This conduct exhibited a separate identity or interest from that of the corporation, and as such Mr. Caridi was found to be personally liable for the full amount of the judgment.
Takeaway
This decision provides an excellent roadmap to address a common situation: a victim of fraud may not be able to prove the fraudulent intent of the individual who made the misrepresentations, but it is clear that those representations were made recklessly as to whether they were true or not. These situations are often complicated by the fact that the individual making these representations may be the directing mind of a closely held corporation, and as such he expects to be shielded from liability. It is always worth considering whether the actions of the individual defendant amount to independent tortious conduct exhibiting separate identity or interest from the corporation, even where the facts of the case don’t support piercing the corporate veil.
This trial decision is currently under appeal.