Ontario Court of Appeal clarifies recklessness threshold in civil fraud claims

What threshold must be met for a finding of recklessness in a civil fraud claim? And when can a corporate officer or director be held personally liable for civil fraud based on reckless misrepresentations? The Ontario Court of Appeal in CHU de Québec-Université Laval v. Tree of Knowledge International Corp.,  considered these questions. The Court upheld the trial judge's finding that the appellant, Michael Caridi, was reckless in representing that his company could deliver National Institute for Occupational Safety and Health (NIOSH) certified N95 masks when he had no basis for an honest belief in the truth of those representations. The Court also confirmed that direct participation in fraud by a corporate officer or director is a standalone basis for imposing personal liability.

Background

At the outset of the COVID-19 pandemic, the respondent, CHU de Québec-Université Laval (CHU), the largest hospital network in Quebec, urgently needed large quantities of NIOSH-certified N95 masks. In late March 2020, CHU entered into an agreement with Tree of Knowledge Inc. (TOKI), a Nevada-incorporated subsidiary of the publicly traded Tree of Knowledge International Corp. (TOK Corp.), whereby TOKI agreed to supply three million NIOSH-certified N95 masks by the end of the day on March 28, 2020. As a condition of the sale, CHU paid TOKI the full purchase price of US$13,693,522.50 in advance of delivery on March 27, 2020. At the time, Michael Caridi was a director and CEO of TOK Corp. and a director and president of TOKI, and he personally negotiated the agreement with CHU on TOKI's behalf.

TOKI never delivered any NIOSH-certified N95 masks. In the days following the contract, Mr. Caridi provided repeated assurances that the masks would be delivered and would be NIOSH-certified, including representing on March 28, 2020, that he was "100%" certain the masks would be NIOSH-certified N95 masks. In April 2020, TOKI delivered a small quantity of KN95 masks labelled "non-medical use," which were found, upon testing, not to be up to the standards required by CHU.

Critically, the trial judge found that at the time the agreement was made, on March 26, 2020, Mr. Caridi had not sourced any masks and had no agreement with his contact, Mr. Lee, or anyone else, for the purchase and sale of any masks, NIOSH-certified N95 masks, or otherwise. It was not until March 29, 2020, the day after the contractual delivery deadline, that any kind of sourcing arrangement was put in place; that arrangement was on its face for "N95 face masks," but did not specify NIOSH-certified N95 masks, and the trial judge found that, based on the available evidence, Mr. Caridi was aware that the masks to be delivered would not be the NIOSH-certified N95 masks that CHU had ordered.

Following the failure to deliver the masks contemplated by the agreement, CHU and TOKI reached an agreement that TOKI would repay CHU by transferring US$1 million to CHU, and would continue transferring a minimum of US$1 million every 10 days starting on May 4, 2020. TOKI ultimately returned only US$2 million to CHU. An investigative receiver traced the disbursement of CHU's funds and found that Mr. Caridi had paid himself over US$1 million, and approximately US$2.9 million was disbursed for purposes entirely unrelated to the CHU transaction.

The trial judge found Mr. Caridi personally liable for civil fraud and ordered him to pay CHU US$11,193,522.50, less the amounts CHU was able to recover from other parties. Mr. Caridi appealed, submitting that the trial judge erred by applying too low a threshold for recklessness and by applying the wrong test to determine personal liability for a corporate officer.

Analysis of the Ontario Court of Appeal

The threshold for recklessness

As set out in Bruno Appliance and Furniture, Inc. v. Hryniak, the elements of a claim for civil fraud are: (a) a false representation made by the defendant; (b) some level of knowledge of the falsehood of the representation on the part of the defendant, whether through knowledge or recklessness; (c) the false representation caused the plaintiff to act; and (d) the plaintiff's actions resulted in a loss.

Mr. Caridi's central argument on appeal was that the trial judge applied too low a threshold for recklessness by equating "carelessness" with "recklessness." Mr. Caridi specifically impugned a passage in which the trial judge described his conduct as constituting "carelessness" and therefore being "reckless" for the purposes of the civil fraud claim.

The Court of Appeal rejected this argument, holding that the trial judge made no error in articulating the test for recklessness. The Court noted that Mr. Caridi focused on an isolated passage in the trial judge's reasons, divorced from its full context. In the paragraphs preceding the impugned passage, the trial judge had dealt at length with the authorities addressing the meaning of recklessness in civil fraud and had expressly adopted the principles from those decisions.

The Court confirmed that recklessness can be established where the maker of a false statement did not have an honest belief that it was true, in the sense that they were indifferent to or did not care whether the statement was true. The Court also affirmed that recklessness can be made out where a person makes a false statement and closes their eyes to the facts or purposefully abstains from inquiring into the facts. This is consistent with decisions holding that recklessness is shown by making a representation with disregard or lack of care for whether it was true or false and without taking any steps to ascertain its accuracy.

Critically, the Court emphasised the trial judge's careful distinction between the type of carelessness that amounts to recklessness in the fraud context and the type of carelessness that supports only a negligence claim. The trial judge found that carelessness does not amount to recklessness and is insufficient to meet the knowledge requirement for fraud where a person has an honest but mistaken belief in the truth of a statement. The Court of Appeal therefore found no error in the trial judge’s articulation of the knowledge element of civil fraud.

Applying these principles to the facts, the Court of Appeal found that the trial judge's findings fully supported his conclusion that Mr. Caridi was reckless. On March 26, 2020, when the agreement was made, Mr. Caridi represented that he could obtain 3 million NIOSH-certified N95 masks when his contact, Mr. Lee, had provided no information or assurances that he could deliver any masks. Over the following days, Mr. Caridi persistently represented that he could obtain at least some NIOSH-certified N95 masks despite never receiving any assurances or information from Mr. Lee, or anyone else, that any such masks could be sourced.

The Court of Appeal concluded that Mr. Caridi had no subjective belief in these representations, nor any factual basis for them. While the trial judge made a generous finding that Mr. Caridi may have been sincere in his intention to source the masks, his representations were made in circumstances where he had no reliable information that he could source such masks, and almost all of CHU's money was disbursed without any of the ordered masks being delivered. The Court observed that these facts could easily have led to harsher conclusions regarding Mr. Caridi's conduct than those reached by the trial judge.

Personal liability of a corporate officer

Mr. Caridi also submitted that the trial judge erred in finding him personally liable, arguing that the law on personal liability for corporate officers and directors should not extend to claims for pure economic loss. He urged the Court to clarify the law in this area.

The Court dismissed this ground of appeal. Reviewing earlier case law, the Court confirmed that an officer or director may face personal liability where the director's conduct is independently tortious or "tortious in itself," or where the director acts pursuant to a "separate identity or interest." However, the Court held that fraud by an officer or director who purports to act on behalf of a corporation gives rise to personal liability regardless of whether the conduct fits within one of these categories. Direct participation in fraud is a standalone basis for imposing personal liability on directors and officers.

While the Court acknowledged that the trial judge's reasoning on personal liability was sparse and failed to identify the "obvious and straightforward path" to personal liability – namely, the fraudulent nature of Mr. Caridi's conduct – the result was correct. He was not facing liability because he was a director. Rather, while he was a director, he himself made fraudulent misrepresentations to CHU on TOKI’s behalf and was reckless as to their truth. The Court declined to use this case to clarify the broader law on personal liability of corporate officers and directors, finding no ambiguity or uncertainty in the applicable law.

Implications

The ruling in CHU de Québec-Université Laval v. Tree of Knowledge International Corp. provides important guidance on the threshold for recklessness in civil fraud claims. The decision confirms that recklessness is established where a defendant makes representations:

• without an honest belief in their truth, being indifferent or careless as to whether the representations are true or false;
• while closing their eyes to facts suggesting the representations are false; or
• while consciously disregarding the risk that the representations are false.

This standard is distinct from mere negligence: an honest but mistaken belief in the truth of a statement will not satisfy the knowledge element of fraud.

The decision also reinforces the principle that fraud by a corporate officer or director is a standalone basis for personal liability, without the need to fit the analysis into the categories of conduct "tortious in itself" or conduct exhibiting a "separate identity or interest." This is a significant clarification, as Canadian courts have debated the scope of personal liability for corporate officers and directors, particularly in cases of pure economic loss. While the Court declined to address the issue of a potential inconsistency between earlier cases dealing with the personal liability of directors and officers , it made clear that no such clarification is needed where the underlying conduct is fraudulent.