At Investigation Counsel PC, we often prepare criminal complaints for our clients that we are assisting with civil recovery actions.
Often our clients suggest they would prefer to simply make a criminal complaint instead of paying for civil litigation. This is, in large part, due to the perception that the police will conduct a “free” investigation the Crown prosecution will lead to a recovery of the loss suffered. In prior blogs, we have discussed the dangers associated with this approach to recovery – see Should Fraud Victims Immediately Contact Police Upon Discovery of a Fraud.
The reality is that police investigations and criminal prosecutions are rarely completed within two years. This is problematic as the civil recovery the litigation process must be commenced within two years from the date the victim reasonably could have discovered their loss. For this reason, and others as discussed below, we recommend that victims of fraud do not wait until the conclusion of the criminal process before considering whether to issue a civil claim for recovery. Rather, we recommend the civil claim be issued prior to and coordinated with the filing of a criminal complaint.
This blog provides some general legal information to fraud victims on civil fraud prosecutions and the hazards of limitation periods.
Limitations Act, S.O. 2002
Under the old limitations legislation, there was an argument that limitation periods do not apply to fraud cases: Re-Mor Investment Management Corp. (Trustee of) ats Montemurro, 1994 Can LII 619 (CA). This is not longer the case.
The basic limitation period for all civil litigation in Ontario is set in Section 4 of Ontario’s current Limitation Act:
Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.
By their nature, most often frauds are concealed by the fraudsters, and accordingly the date of discovery is key to when the two years tolling period starts to run. Section 5 of the Limitations Act provides:
A claim is discovered on the earlier of:
- the day on which the person with the claim first knew:
- the loss or damage occurred;
- the loss or damage caused; and
- the day on which a reasonable person with the abilities and in the circumstances of
that person first ought to have known of their [right to make a claim].
The Doctrine of Fraudulent Concealment
What has been coined the “doctrine of fraudulent concealment” is a simple concept relating to limitation periods. That is, where there has been a fraudulent concealment of the existence of the cause of action, the limitation period will not begin to run until the earlier of the date on which the victim actually discovers the fraud, or until the date it is deemed the victim, with reasonable diligence, ought to have discovered the loss: see Guerin ats Canada,  2 SCR 335.
This two year limitation period applies to both the common law version of fraud, sometimes referred to as deceit or fraudulent misrepresentation, and to the equitable version of fraud, which often refers to the omission to provide material information where a special relationship exists, such that it is unconscionable that material information be concealed: see Kitchen at Royal Force Association,  2 All ER 241 (CA), as quoted in M(K) ats M(H),  3 SCR 6.
Equitable Fraud and Discovery
In investment or business transactions, equitable fraud is the claim most applicable where a fraudster has concealed materials facts. The first step in establishing equitable fraud is establishing that a special relationship existed between the parties. A fiduciary relationship quite clearly establishes this threshold. A special relationship can be established on a lower threshold, however, such as situations where it is unconscionable for a seller to fail to disclose material facts to a purchaser: Halloran ats Sargeant et al (2001), 142 OAC 286.
In the case of equitable fraud, the limitation period does not commence when the fraudster committed the wrongful act. Rather, a fraud victim only needs to prove (1) that the defendant knowingly concealed material facts, and (2) the date the victim discovered the loss. In other words, it is said that a defendant can not conceal a cause of action by fraud: King ats Victor Parsons & Co.,  1 All ER 206, as quoted in Wilson ats McDonnell Douglas Canada Ltd. (1985), 52 OR (2d) 74.
Reasonable Diligence and the 15 Year Ultimate Limitation Period
In the law as it applies to limitation periods there is a presumption in favour of fraudsters that their victims are deemed to know of their loss on the date their fraud was committed. To overcome the obvious unfairness to victims of the concealed acts of fraudsters, the Limitations Act provides that the time the two year limitation period begins to run on the date the victim should have reasonably become aware of that they were incurring a loss.
Reasonable diligence is determined by what a court deems is objectively reasonable. In other words, a fraud victim is inviting lengthy and expensive litigation by waiting to issue a claim after subjective discovery of their loss. It is far less expensive and risky for fraud victims to simply have their claims investigated and a claim issued by their civil fraud recovery counsel on a timely basis after discovery of the loss. For an example of a discussion on reasonable diligence, see Ascent Incorporated ats Fox 40 International Inc., 2009 Can LII 36994.
In any event, reasonable diligence by a fraud victim must been acted upon within 15 years of the date the fraud was perpetrated: see section 15(2) of the Limitations Act
Limitation Periods on Declarations and Judgments
In most fraud cases, we plead for various declarations, such as that the judgment is in fraud, and that the judgment survives assignment of the debt of the fraudster into bankruptcy. There is no limitation period on seeking such declarations. The problem, of course, is that declarations without an accompanying order to pay a judgment restricts the opportunity to make a recovery.
Once a judgment in fraud has been obtained, it hangs around the fraudster’s neck as a millstone until it is paid. There is no limitation period in attempting recovery on a judgment for fraud. For further information we refer our readers to our blog Enforcing Judgments:
Promissory Notes and Fraud
Promissory notes create a special problem for fraud victims. For limitation period law purposes, the date of the demand is deemed to be the date the promissory note was issued. Accordingly, new promissory notes should be negotiated (extended) or litigation commenced within two years from the date the promissory note was issued. For further information, see the case of Hare ats Hare,  OJ No. 4955 (CA).
Limitation Periods and Amendments of Pleadings
Sometimes fraud victims plead breach of contract or negligent misrepresentation, as opposed to pleading fraud as a means to avoid the risk of adverse costs that could be imposed on a claimant if they can not prove a fraud allegation. In some cases, the defendants assign themselves into bankruptcy upon receipt of this type of claim to avoid repaying the debt. Some claimants then seek to amend their pleading to allege fraud to obtain a declaration that the debt will survive the defendant’s bankruptcy assignment.
The risk associated with amending a pleading more than two years after the discovery of the loss, is that this may give rise to a defendant bringing forth a limitation period defence. This has happened in numerous cases – for an example see Bozzo (Bankruptcy), Re, 2005 Can LII 17919 (ON SC). Bozzo provides a good review of the common law history of the law of limitations periods, as it applies to fraud cases.
Criminal Restitution Orders and Limitation Periods
Section 741 of the Criminal Code provides that the “person to whom the amount was ordered” (the fraud victim in a criminal case) may enter a restitution order in the civil courts for a declaration that it is a civil debt against the offender. The idea is that after the civil judgment is entered, a fraud victim can avail themselves of civil debt enforcement measures.
In our view it is a risky recovery strategy to make a criminal complaint and hope for a criminal restitution order. Often criminal charges do not result in convictions for various reasons. The reasons often include the Crown being unable to establish proof beyond a reasonable doubt, procedural tactics and defences by defence lawyers, and lack of Crown and police resources to fully investigate and prosecute these cases.
Further, even if a conviction is entered, the criminal courts are not required to make a restitution order, and even if a criminal courts do make a restitution order, it is often only ordered for a fraction of the real loss. All said, recovery in the criminal process is often disappointing and, if one attempts to issue a civil claim the criminal case concludes, they may be doubly disappointed to find they are barred by bringing a civil case because time has expired per the Limitations Act. For more information, see our blog Enforcing Criminal Restitution Orders:
Coordinating civil recovery prosecutions with criminal complaints is something fraud victims should canvas with their fraud recovery lawyers before commencing either process. For further information, please contact us.
Norman Groot, LLB, CFE, CFI – September 15, 2014