Kowal v. Sun Star Energy Inc.: Liability for fraudulent misrepresentation ‎by joint tortfeasors and through intermediaries‎

In the recent decision of Kowal v. Sun Star Energy Inc., 2020 ABQB 244 (“Sun Star”), all but one of the plaintiffs were awarded damages when the Court found that both the corporate defendant and the defendants in their personal capacity were liable to the plaintiffs for fraudulent misrepresentation arising from purchase of shares. Though offering no new guidance on intent as a requisite element to prove fraudulent misrepresentation, the case is meaningful in that it entrenches appellate decisions from outside Alberta with respect to joint liability and fraudulent misrepresentation through an intermediary into Alberta’s civil fraud jurisprudence.

Background

In 2011, the defendants marketed and sold shares in their company, Sun Star Energy Inc.

Sun Star was created by the defendants in 2009 to exploit various oil and gas interests in Alberta. To attract investors, the defendants crafted and distributed a variety of investor materials including a general email about the nature and proposed development of interests held by Sun Star; a three year business plan with information on the assets, potential revenue, return on investment and financing of Sun Star; and an investor presentation with detailed information about the properties and opportunities available to Sun Star (the “Investor Materials”). 

Based on review of the Investor Materials and additional information provided by the defendants, the plaintiffs purchased various flow-through shares, common shares, or both, in Sun Star. When the plaintiffs became aware that much of the information contained in the Investor Materials and subsequent representations made by the defendants were false or misleading,  the plaintiffs filed claims against Sun Star and its officers and directors personally for fraudulent misrepresentation, seeking to recover their investment.

Fraudulent misrepresentation

In coming to her decision on the joint liability of the individual defendants, Justice Woolley leveraged jurisprudence from the British Columbia Court of Appeal in Cruise Connections Canada v Szeto and Osborne v Pavlick.  In doing so, the Court built upon the accepted legal principles respecting joint tortfeasors acting in concert with, or for the benefit of, each other as laid out in The Koursk and articulated in Raywalt Construction Co. Ltd. v J. R. B. to firmly entrench the principle that a common action agreed to jointly, whether committed by one or all tortfeasors, for the purpose furthering a common goal, is sufficient to prove joint liability for fraudulent misrepresentation. Specifically, Justice Woolley held it did not matter that the defendants did not jointly prepare the Investor Materials, nor jointly provide fraudulent information to the plaintiffs. Rather, it was enough that the defendants all had the requisite knowledge that the information provided to the plaintiffs was false and the defendants acted in concert on a common enterprise to defraud the plaintiffs.

Perhaps more significantly, Sun Star firmly establishes the principle that a party that fraudulently misrepresents information to an innocent intermediary who then communicates the misrepresented information to an innocent third party which relies on it to its detriment is liable to the third party for fraudulent misrepresentation. The existing Alberta caselaw on this point is thin and in coming to her decision, Justice Woolley relied on the evidentiary findings of the BC Court of Appeal in R v Stoltz and the decision of R v Steinhubl from the Alberta Court of Queen’s Bench. Applying the existing jurisprudence to the case at bar, Justice Woolley held the defendants could not avoid liability to the plaintiffs who acted on the misrepresented information provided to them through an innocent intermediary who had received the information directly from the defendants. Importantly, the defendants knew a number of the plaintiffs decided to invest in Sun Star solely on the basis of information conveyed to them by the intermediaries. Thus, a party that relies on intermediaries to execute a fraud is accountable to the third party as though they had executed the fraud on that party themselves. While a degree of meaningful separation between the parties may in the future prove an exception to this principle, Sun Star appears to establish a concise principle of law on the question of liability for fraud through an intermediary.

Take aways

Despite the opportunity, the Court did not clarify the role of intent in the tort of fraudulent ‎misrepresentation in Alberta‎. This question will have to be left for another day. Sun Star does however provide meaningful guidance on the joint liability of tortfeasors in fraudulent misrepresentation and sets meaningful precedent for liability for fraud perpetrated through an intermediary.

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