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Fraud Recovery and the Deemed Undertakings Rule

Canadian Fraud Lawyer

 We have blogged in the past on issues to consider in coordinating civil and criminal investigations and prosecutions – see: https://investigationcounsel.com/coordinating-criminal-and-civil-justice-as-a-means-of-recovery-for-fraud-victims/ . The issues to consider are in large part driven by the fraud victim’s objectives; that is, after determining whether the primary objective is recovery or retribution – see: https://investigationcounsel.com/what-you-should-consider-if-you-discover-you-are-a-victim-of-fraud-our-views-on-triaging-your-fraud-case/. This blog provides further information for fraud victims to consider when coordinating their civil recovery investigation and prosecution with their complaint to police.

Compelling Fraudster Compliance with the Civil Discovery Process

The rules of civil litigation provide that anyone named in a civil action must participate fully in the civil discovery process. This means that after pleadings close (a claim is issued and a defence is served), the plaintiffs and the defendants must disclose to each other all relevant documents in their possession and control, and then make themselves available for examination to answer all relevant questions based on the pleadings and the documents – see: R v. Nedelcu, [2007] OJ No. 1188 (SCJ) at para 15 to 17 (affirmed 2012 SCC 59).

Most often plaintiffs wish to comply with their discovery obligations to move their case along. Sometimes defendants, most notably those accused of fraud, obstruct the discovery process in a hope that the plaintiff will not pursue the litigation. To deal with fraudsters who obstruct the discovery process, the Rules provide ways to motivate them to do so, such as striking their defence, finding negative inferences against them, making them pay cost orders, ordering third parties to deliver the documents, contempt proceedings, etc. – see Goodman v. Rossi (1995), 125 DLR (4th), 613 (Ont. CA), at para. 624. This blog does not review the particular rules created to obtain discovery compliance, but rather discusses a rule designed to motivate a defendant to comply with the discovery process.

The Deemed Undertaking Rule

Some fraudsters and their lawyers obstruct the civil discovery process because of their concern that their own documents and admissions will result in a finding of civil fraud against them. They are also concerned that their documents and admissions will be turned over to the police to support a fraud victim’s criminal complaint. They seek to avoid their obligation to answer all relevant questions put to them on civil discovery because such answers might disclose their involvement in criminal offences – see: Royal Bank of Canada v. Wilford (1985), 2 CPC (2d) 281 (Ont. Master).

Likewise, some fraud victims are disappointed to find out that police investigators and Crown prosecutors will not accept documents and confessions they obtained from fraudsters through the discovery process of their civil litigation.  A fraud victim’s disappointment is often rooted in their mistaken views of the purposes of the civil versus criminal process. Some fraud victims fail to appreciate that civil prosecutions are intended to provide for the enforcement of private rights such as financial recovery from victims and declarations of wrongdoing, whereas criminal prosecutions are intended to address societal interests such as the investigation of criminal behavior, general deterrence against those considering criminal behavior, specific deterrence against those who have engaged in criminal behavior and rehabilitation of offenders so they may once again become productive members of society.

The Courts have addressed both the fraudsters and the fraud victims concerns through a concept called the Deemed Undertaking Rule. The Deemed Undertaking Rule has been part of English and Commonwealth law for a long time, and more recently has been codified into statue and the civil litigation Rules of Civil Procedure. The Rule imposes on both plaintiff and defendants in civil litigation, and their lawyers, an undertaking (a promise) not to use the documents and oral evidence they receive from the opposing side for purposes other than the litigation they are in. In other words, the Rule imposes a duty on parties to litigation and their lawyers to keep the documents and oral evidence they receive from the opposing side confidential. The duty of confidentiality has a further implication: a breach of such duty may result in the evidence being held to be inadmissible by reason of being a form of privilege (privilege being a law of evidence).

Rational for the Deemed Undertaking Rule

The Deemed Undertaking Rule (duty of confidentiality) was developed to encourage the societal and judicial interest in having civil claims adjudicated in the most expeditious and least expensive way on the merits either by way of settlement or, if that cannot be done, by way of trial. To describe otherwise, the Courts consider that full pre-trial discovery by both fraud victims and fraudsters is essential for the following reasons:

  • to ensure all relevant evidence is disclosed to assist the finding of the truth;
  • to prevent surprise or litigation by ambush at trial;
  • to encourage settlement once the facts are known before trial;
  • to eliminate vexatious issues and expose groundless claims; and
  • to narrow the issues that have merit for trial in the event that settlement is not achievable.

These are societal and private objectives – see: R v. Nedelcu, [2007] OJ No. 1188 (SCJ) at para. 22 (affirmed 2012 SCC 59); see also: ACI Brands Inc. ats Pow, 2014 ONSC 2784.

Right to Privacy and Right Against Self Incrimination

Society and the Courts have held that in civil litigation the public interest at getting at the truth outweighs a fraudster’s privacy interests. A fraudster’s privacy interests – that is, the right to keep his or her devious thoughts and documents private – is really another way of acknowledging a fraudster’s Charter right against self incrimination – see: Junan ats Doucette [2005] S.C.J. No. 8, para 23 to 25; see also: R v. Nedelcu, [2007] OJ No. 1188 (SCJ) at para 13 and 27 to 36 (affirmed 2012 SCC 59).

Accordingly, the Deemed Undertaking Rule is designed to protect both the fraudster’s right against self incrimination in the criminal courts while at the same time promoting expeditious and efficient civil litigation. Another way to look at this is that the focus of a civil action is remedying a right of the victim, while the focus of a criminal prosecution is respecting the rights of a fraudster. In other words, the theory goes that a fraudster who is assured that his or her admissions in civil litigation will not be used for a police investigation will be more likely to provide more complete and candid discovery and tell the truth, even if it means admitting that their conduct is criminal in nature – see: ACI Brands Inc. ats Pow, 2014 ONSC 2784.

To further encourage the goal of getting at the truth through civil discovery, the documents that are exchanged are provided only to the party’s lawyers (or themselves if self represented), and discovery examinations are held in closed board rooms at civil discovery offices and not open court.  Further, the transcripts from the examinations are held by the party’s lawyers (or themselves if self represented) and the court reporters in confidence, and are not available to the general public by way of a search of court records. The theory further goes that as most civil cases are settled and never go to trail, there is little opportunity for the police to access admissions made by fraudsters in the civil discovery process: see Junan ats Doucette [2005] S.C.J. No. 8, para 21.

Direct and Derivative Use Immunity to Statutory Compelled Evidence

Section 5 of the Canada Evidence Act (and the corresponding sections of provincial Evidence Acts) eliminates the right formerly enjoyed by fraudsters to refuse to answer questions on the grounds that their answers may incriminate themselves or establish liability in a civil proceeding (“plead the 5th”).  It provides that evidence given at civil discovery shall not be used and is not admissible in a criminal trial or other criminal proceeding against him or her other than a prosecution for perjury.

As a result of this rule, some lawyers for fraudsters read section 5 of the Canada Evidence Act (and the corresponding sections of provincial Evidence Acts) into the record at the commencement of an oral discovery. When this happens, fraud victims can generally expect that the fraudsters will be providing them some sort of admission of their criminal conduct.

Another concern of fraudsters is the derivative use of their evidence obtained from a civil discovery for other purposes.  A discussion of this issue is beyond the scope of this blog and is an issue reviewed on a case-by-case basis by the criminal courts – see: R. v. S(RJ), [1995] 1 SCR 451 at para 191-204; see also: ACI Brands Inc. ats Pow, 2014 ONSC 2784.

Exceptions to the Deemed Undertaking Rule

Like almost all law, the Deemed Undertaking Rule is not absolute. There are exceptions as to when information and documents obtained through the civil discovery process can be used for collateral purposes. For the purposes of this blog, fraud victim should be aware that they can apply to the Court for leave to use the fraudster’s discovery evidence, but only when societal interests in justice (not their private interests) outweigh the fraudster’s privacy interest.

For example, documents and transcripts of evidence of a fraudster can be used by the Crown to impeach a fraudster if the fraudster takes the stand in his criminal trial and attempts to tell the Court or a jury a different story than he or she told at his civil discovery to explain away his fraud:  see R v. Nedelcu, [2007] OJ No. 1188 (SCJ) at para 54 (affirmed 2012 SCC 59).  As stated in Junan ats Doucette [2005] S.C.J. No. 8, para 41, it is a societal interest in justice that a fraudster not be allowed to play games in the Courts.

Other exceptions include:

  • where important and urgent concerns of public safety are involved – see: Smith ats Jones, 1 SCR 455,where the homicidal thoughts of a defendant were ordered to be disclosed to the police;
  • where there are concurrent civil actions involving some of the same parties and a similar subject matter – see Lac Minerals ats New Cinch Uranium Ltd. (1885), 50 OR (2d) 260;
  • where the same lawyer acts for numerous parties dealing with the same subject matter – see: Logan ats Harper (2004), 72 OR (3d) 706 (Ont. Master), at para 12; and
  • where the evidence has been filed in the civil courts as evidence to support a motion and where the opposing party has not sought a sealing order – see: R v. Nedelcu, [2007] OJ No. 1188 (SCJ) at para 40.

In the latter exception, once evidence is filed in the civil courts to support a motion, any member of the public may obtain copies of that evidence as it becomes public documents available to be viewed or copied in the Courts. The societal interest in this circumstance is that of transparency of the courts.  In cases where a document is filed in the courts, it loses whatever confidential nature it may have had and can be used by third parties for other purposes – see: R v. Nedelcu, [2007] OJ No. 1188 (SCJ) at para 4 (affirmed 2012 SCC 59).

Where the Courts have concluded that a plaintiff’s strategy for the motion for leave of the deemed undertaking rule was to provide the evidence to police so that the police would seek further evidence to assist their civil case or pressure a defendant into settlement, the Courts have refused the motion – see: 755568 Ontario Inc. ats Linchris Homes Ltd. (1990), 1 OR (3d) 649. The public interest in investigating possible crimes is not in all cases sufficient to relieve against the undertaking – see Perrin ats Beninger, [2004] OJ No. 2353.

Where the Courts have concluded that a plaintiff’s strategy for the motion for leave of the deemed undertaking rule was to launch another action, the Courts have refused the motion – see: Logan ats Harper (2004), 72 OR (3d) 706 (Ont. Master), at para 12.

If an application is made by a fraud victim to the Courts for leave of the deemed undertaking rule, the Courts should deal with these motions expeditiously: Junan ats Doucette [2005] S.C.J. No. 8, para 31.

Motions for Stay of Civil Proceedings by Fraudsters Facing Criminal Charges

Notwithstanding the protection offered to fraudsters by the Deemed Undertaking Rule, some fraudsters have brought motions to stay civil proceedings to allow for the completion of the criminal prosecutions they are facing. In other words, some fraudsters wish to leave open the spinning of any story they wish at their criminal trial.

In most cases, the courts find in favour of fraud victims and dismiss motions to stay civil actions brought by fraudsters. The reason goes back to the purposes of civil and criminal law.  In civil prosecutions, it is the victim him/herself who initiates the process (as opposed to the state in criminal cases), and it is the victim who controls the process, and the focus is on recovery and declaratory relief, as opposed to state interests of denunciation of criminal conduct and rehabilitating offenders – see: R v. Nedelcu, [2007] OJ No. 1188 (SCJ) at para 21 and 47 to 48.

Practical Application of the Rule

Another reality of our justice system is that the Rule is not strictly adhered to where the alleged criminal conduct is less serious.  In other words, the more serious the criminal conduct, the more strictly the Rule is adhered to. This is because many people are not aware of what criminal conduct is, and often make allegations based on shades of suspicion or rumour derived from information they receive through the civil discovery process – see: Junan ats Doucette [2005] S.C.J. No. 8, para 43. The Rule is designed to protect the more serious assertions of criminal conduct, and also the wrongdoing of persons other than the person being examined.

Police Requests for Evidence Protected by the Deemed Undertaking Rule

From time to time the police themselves will seek to take advantage of statutory compelled evidence (civil discovery evidence) to undermine the fraudster’s right to silence in the criminal courts (the Charter right to protection against self incrimination) without prompting by the victim of a crime.

For example, where the police attempted to access the transcripts from a civil case where a child care worker had been sued and the civil case settled, and the child care worker was the subject of a police investigation for child abuse, the Courts held that if the police wish to seek evidence given by a subject of their investigation in civil litigation, they must seek a subpoena for the documents or a search warrant under the Criminal Code and make their case for it before a justice of the peace – see: see Junan ats Doucette [2005] S.C.J. No. 8.

The interplay of the Deemed Undertaking Rule and right against self incrimination has been recently addressed in the context of evidence used for a Mareva injunction (asset freezing order) brought by a fraud victim and a motion to set aside the injunction brought by the fraudster. The Court held that the right against self incrimination is not absolute, and that it is a reasonable exception in Canadian law in a civil litigation context to force a fraudster to testify about the location of his ill gotten gains even if such information would otherwise incriminate himself – see: ACI Brands Inc. ats Pow, 2014 ONSC 2784.

The ease of which police can obtain evidence by search warrant is subject to further checks and balances.  Even if the police are granted a search warrant or subpoena, the search warrant or subpoena only grants the police the right to access to the documents or transcripts – not the right to use the documents or transcripts or for a Crown to introduce them into evidence  at a criminal trial. The Crown is permitted to ask a Court if they may introduce such documents and transcripts into evidence, but such consideration would be subject to the Court’s consideration of the fraudster’s right to protection against self incrimination as discussed above – see Junan ats Doucette [2005] S.C.J. No. 8, para 55.

Sanctions for Breaches of the Deemed Undertaking Rule

If a fraud victim fails to respect his or her duty of confidentiality to documents and evidence provided to him or her by a fraudster in the context of civil litigation, or otherwise breaches the Deemed Undertaking Rule, the Courts may impose dramatic orders that may reduce their chances of recovery. For example, fraudsters may bring motions for:

  • injunctions to prohibit the use of the wrongfully disclosed information;
  • a stay of the civil proceedings until the conclusion of the criminal proceedings;
  • the dismissal of the civil claim;
  • declarations of inadmissibility of their admissions at a civil trial; and

other such relief such as cost orders that a court may deem appropriate. If the misuse by fraud victims of confidential evidence continues, they may be subject to contempt proceedings – see R v. Nedelcu, [2007] OJ No. 1188 (SCJ) at para. 42 and 43. Accordingly, fraud victims are encouraged to consult with their counsel before disclosing any information or evidence they obtain by way of the civil discovery process to third parties.

Encouraging Settlement

Aside from a fraudsters concern about their discovery evidence being used to commence or further a criminal prosecution against them, fraudsters should be aware that if they fail to settle their civil cases, they risk internet reputational harm brought by fraud victims or other concerned third parties. The Ontario courts have held that once a case is completed, the publication of judgments and evidence including transcripts containing their admission on the internet is not prohibited if these documents were filed as part of a public trial – see: Lewis ats Cantertrot Investments Ltd., 2007 Carswell Ont 7330.

The significance of this ruling to fraud victims is significant as fraudsters are often sociopaths who have no empathy for their victims and are only compelled to settle and pay back their ill gotten gains to maintain their ill considered vanity. To this end, in the age of the internet, the societal interest of fraud prevention by those who conduct due diligence before entering into transactions with fraudsters is enhanced by the publication of judgments against fraudsters and the evidence used to obtain those judgments.  Our message to fraudsters is that you may wish to settle before your discovery.

Inquiries

The Courts have held that the “very essence of the purpose” of the adoption of the deemed undertaking rule was to “facilitate full disclosure on discovery even by crooks” – see: Junan ats Doucette [2005] S.C.J. No. 8, para 47. At Investigation Counsel PC, we only act for fraud victims, and we are open to more fully explaining the implications of the Deemed Undertaking Rule to recovery efforts we are engaged in. For further information, please contact us.

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Norman Groot

About Norman Groot

Based on my police experience and my experience thereafter as a litigator, I have joined forces with other lawyers with police experience and created the law firm Investigation Counsel Professional Corporation.

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