COURT FILE NO.: CV-19-00628138-0000

DATE: October 31, 2022

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: WARREN CROWDER and JAYNE MANKTELOW, Plaintiffs/Moving Party

AND

CANADA BUILDS COMPNY LTD., CANADA BUILDS COMPANY INC., ROY GRAHAM and ROBERT GRAHAM, Defendants/Respondent Party

BEFORE: Koehnen J.

COUNSEL: Ryan E. Stern, for the Plaintiffs/Moving Party

Austin Riley and James R. Webster, for the Defendants/Responding Party

HEARD: October 20, 2022

ENDORSEMENT

[1] The critical issue on this motion for summary judgment concerns the personal liability of two principals of the defendant Canada Builds Company Ltd. For the reasons set out below, I find that they are personally liable for two of the three deposits the plaintiffs paid because those deposits were induced by representations by the personal defendants that fall within the test for civil fraud and fall within principles that justify piercing the corporate veil.

[2] The dispute arises out of a contract that the plaintiffs entered into with Canada Builds Company Ltd. (“Canada Builds”) for a prefabricated modular home for a total price of $610,184.80 including HST.

[3] The contract was entered into on January 28, 2019. The agreement called for payments to be made when the builder reached certain milestones as follows:

• 20% of the purchase price upon signing the Agreement;

• “15% on start of Framing in factory”;

• “10% on start of roof trusses”;

• “10% on start of electrical & plumbing rough-ins”; and

• “10% at the start of drywall.”

[4] The plaintiffs paid the first three payments which came to a total of $269,861.05

[5] Construction on framing and roof trusses never began despite the plaintiffs having made payments for them. Canada Builds ultimately stopped carrying on business without ever constructing the plaintiffs’ home and without returning any of their deposits.

[6] In a factum filed for all defendants, the defendants “acknowledge that the Plaintiffs are entitled to Judgment against the corporate defendant Canada Builds for $269,861.05 for breach of contract.” The factum does not define Canada Builds and does not distinguish between the defendant Canada Builds Company Ltd and the defendant Canada Builds Company Inc.

[7] I grant judgment against Canada Builds Company Ltd. but not against Canada Builds Company Inc. The contract was with Canada Builds Company Ltd. I have been directed to no evidence that implicates Canada Builds Company Inc. in any of the conduct at issue in this action. The only evidence I have of that entity is that it was a dormant company that was never used.

[8] As noted, the personal defendants deny liability for any part of the claim. Whether they should be held liable requires a close factual and contextual analysis of the circumstances of the case. I turn to that context now.

[9] Canada Builds was established by the defendant Roy Graham. At the time the contract was entered into, Roy was in his early seventies. He was the sole registered shareholder, director, and officer.

[10] The defendant Rob Graham is Roy’s son. Although Rob described himself as nothing but a salesperson, he told the plaintiffs at various times that he was the Director of Sales, the Sales Manager and that he was being groomed to take over the business. His email signature describes him as Director of Sales.

[11] The plaintiffs say they entered into the agreement based on representations by Roy and Rob that the house would be delivered in the summer of 2019. The plaintiffs say the individual respondents should be liable for the first deposit of $122,036.96 because Rob and Roy knew or ought to have known when the contract was signed on January 28, 2019, that the home could not be delivered by the target delivery date of July, 2019 because of construction backlogs within their factory. I was not directed to any evidence to support this allegation. The plaintiffs ask me to infer this from the overall evidence in the case. In my view, there is no basis to do so. While it may be that the defendants had an overly optimistic view of their ability to complete projects even in January 2019, personal liability does not attach simply because individuals have optimistic or ambitious views of what they can accomplish.

[12] The situation differs with the second and third deposits.

[13] The plaintiffs paid the second deposit of $91,527.72 on March 18, 2019. As noted, that deposit was due “on the start of framing in the factory.” The payment was made in response to an invoice dated March 14, 2019, for “deposit on construction – framing” with payment due on March 22, 2019. A request for payment was made by Rob on March 14, 2019, by an email in which he noted that framing would begin the following week.

[14] Roy admits that he was aware by March 2019 that the factory was incurring delays in its production schedule.

[15] Rob said on his cross-examination that he did not know the date by which he became aware of construction backlogs. I infer from the evidence that when Rob sent his email on March 14, 2019, and sent the framing invoice, he knew that framing would not begin the week after March 14 or made that statement with reckless disregard to the truth.

[16] I draw that inference from contextual evidence about the business including the following:

i. Rob admitted during cross-examination that it was his job to coordinate between clients and the people constructing the houses with respect to delays.

ii. Canada Builds had 15 to 20 employees and a single warehouse in which the homes were constructed. A maximum of five homes could be constructed in the warehouse at any one time. The home the plaintiffs purchased was a larger one which could be built in only one of two spots in the warehouse.

iii. The plaintiffs’ home was delayed because the two locations in the warehouse at which their home could be constructed were taken up with two other projects that had incurred significant delays.

iv. Rob stated during cross-examination that he was not aware of the status of framing when he demanded payment of the framing deposit.

v. Framing never started even though the plaintiffs paid the framing deposit in full.

vi. Rob was responsible for sending out invoices for the deposits.

[17] Although Rob stated during cross-examination that he did not know if framing started the week of March 22, I do not accept that evidence. Given that there were only two spots in the warehouse on which framing could occur, and only five houses could be constructed at any one time, I find that Rob knew that framing did not begin during the week of March 22 and in fact knew that framing never began on the plaintiffs’ home. Given that it was Rob’s job to send out invoices and his job to coordinate any delays between the staff on the floor and clients, he had to have known that framing did not begin during the week of March 22 and had to have known that framing could not begin that week. The two homes that took up the places in the warehouse where the plaintiffs’ home was to be constructed were not delivered until the fall of 2019.

[18] Given the fact that the two spots in the warehouse where framing could occur for the plaintiffs’ home were occupied until the fall of 2019, Rob’s representation that framing would commence during the week of March 22 was not true. Even if Rob had an extremely optimistic view of scheduling when he wrote his email on March 14, he should have advised the plaintiffs during the week of March 22 that framing had not begun and at least given the plaintiffs the right to ask that the second deposit be returned.

[19] Both Rob and Roy admitted that they never advised the plaintiffs of any delays.

[20] Rob sent a further invoice for the third deposit on May 7, 2019, for $56,296.37. As noted, that deposit was payable only on the start of the roof trusses. In light of the facts set out above, it is impossible for Rob not to have known that construction of the roof trusses could not possibly commence on or about May 7, 2019. He had to have known by that point that the two larger projects that were delaying the construction of the plaintiffs’ home were still occupying the only two spots in the warehouse on which the plaintiffs’ home could be built and had to have known that framing had not yet even started. Sending out invoices that are due only on commencement of certain work amounts to a representation that the work being invoiced has or is about to commence imminently. Rob sent those invoices and made those misrepresentations when he knew the representations were not true or made the representations with reckless disregard about their truth.

[21] Rob admitted on cross-examination that he was aware of delays in construction by May 2019 but did not communicate those delays to the plaintiffs.

[22] Rob says he resigned from Canada Builds at the end of May 2019. However, he continued to meet with the plaintiff Jayne Manktelow after that to discuss ongoing construction of the house without advising her that he had resigned from Canada Builds. Instead, he continued to reassure her that delivery was on schedule.

[23] In July and August, the plaintiffs tried to reach the defendants unsuccessfully. On August 15, Roy advised that delivery of the house would be delayed. On August 19 Jayne visited the Canada Builds warehouse and saw a sign posted on the door noting that Canada Builds no longer occupied the premises. Canada Builds was locked out of the warehouse in June 2019.

[24] All parties agree that the matter is appropriate for summary judgment and is not one in respect of which additional facts will be available at trial.

[25] The test for civil fraud was recently confirmed by the Court of Appeal in Paulus v. Fleury,[^1] as requiring:

(i) a false representation of fact by the defendant to the plaintiff;

(ii) knowledge the representation was false, absence of belief in its truth, or recklessness as to its truth;

(iii) an intention that the plaintiff act in reliance on the representation;

(iv) that the plaintiff act on the representation; and

(v) that the plaintiff suffer a loss in doing so.

[26] For Rob to send out invoices for the second and third deposits falls within this definition of civil fraud. Rob made a false representation in both cases to the effect that framing and roof truss construction was about to commence. He knew those representations were false or, in the alternative was reckless as to the truth of the representations. The plaintiffs relied and acted on the representations by making the second and third deposits. The plaintiffs suffered a loss of those deposits in doing so.

[27] The defendants deny that there is evidence that the plaintiffs relied on the representations. The defendants submit that the plaintiffs must show positive evidence that, but for the representations, they would not have advanced funds. I am satisfied that I can infer reliance from the facts before me.

[28] The contract required the plaintiffs to advance the second and third deposits only when the work began on framing or roof trusses. The defendants specifically represented that framing would commence the week the invoice was due. In response to that, the plaintiffs advanced funds. The plaintiffs were never advised that delays made commencement of framing the following week impossible, were never advised after the following week that framing had not begun and were never advised when the third deposit was sought that framing had not yet even started. In those circumstances, I am satisfied that I can infer reliance on the part of the plaintiffs. Another way to ask the same question is to ask whether, on the balance of probabilities, the plaintiffs would have paid the second and third deposits had they been told that: the defendants were incurring delays, framing was not likely to start the week after payment for framing was demanded and that framing had not yet even started when the third deposit was demanded. It is extraordinarily unlikely that the plaintiffs would have made the second and third deposits had they been told those facts. That indeed is likely why the defendants disclosed this information.

[29] In addition, the defendants resist personal liability by arguing that Rob could not be liable for a misrepresentation made in the course of his duties as an employee of Canada Builds unless he made that misrepresentation in a capacity separate and apart from that of the corporation.

[30] I do not accept that argument. The Ontario Court of Appeal made it clear in ADGA Systems International Ltd. v. Valcom Ltd.,[^2] that employees are personally liable for any torts they commit even if committed in the course of their employment and on behalf of a corporation. The only exception to this rule is the tort of inducing breach of contract. Even then, however, employees will be liable for inducing breach of contract when they act in a fraudulent manner. The conduct the plaintiffs impugn is not breach of contract but misrepresentations that framing and roof truss construction were beginning when Rob knew they were not.

[31] The concept of fraud has also been expanded by the courts to include equitable or constructive fraud. In Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club,[^3] Justice Binnie for the majority of the Supreme Court of Canada described the nature of equitable or constructive fraud as follows:

What amounts to "fraud or the equivalent of fraud" is, of course, a crucial question. In First City Capital Ltd. v. British Columbia Building Corp., McLachlin C.J.S.C. (as she then was) observed that "in this context fraud or the equivalent of fraud' refers not to the tort of deceit or strict fraud in the legal sense, but rather to the broader category of equitable fraud or constructive fraud ... Fraud in this wider sense refers to transactions falling short of deceit but where the Court is of the opinion that it is unconscientious for a person to avail himself of the advantage obtained" (p. 37). Fraud in the "wider sense" of a ground for equitable relief "is so infinite in its varieties that the Courts have not attempted to define it", but "’all kinds of unfair dealing and unconscionable conduct in matters of contract come within its ken.’" [Citations omitted.][^4]

[32] The concept of equitable or constructive fraud therefore captures conduct falling short of deceit but conduct that is unconscientious, unconscionable, or unfair.

[33] If the individual defendants are not liable in civil fraud, the plaintiffs submit they are liable for negligent misrepresentation. The distinction between negligent and fraudulent misrepresentation is “that proof of a dishonest or fraudulent frame of mind on the defendant's part is required in actions of deceit,”[^5] but not for negligent misrepresentation. If I am incorrect in my finding that the invoices and email of March 14 amounts to fraudulent misrepresentations, I would find the individual defendants liable for negligent misrepresentation because the statements were made without any investigation as to their truth.

[34] The plaintiffs rely on the doctrine of piercing the corporate veil to hold the individual defendants responsible.

[35] In 642947 Ontario Ltd. v. Fleischer,[^6] the Ontario Court of Appeal described the circumstances in which piercing the corporate veil is appropriate as follows:

To pierce the corporate veil is to disregard the separate legal personality of a corporation, a fundamental principle of corporate law recognized in Salomon v. Salomon & Co. Only exceptional cases -- cases where applying the Salomon principle would be "flagrantly" unjust -- warrant going behind the company and imposing personal liability. Thus, in Clarkson Co. v. Zhelka, Thompson J. held that instances in which the corporate veil has been pierced "represent refusals to apply the logic of the Salomon case where it would be flagrantly opposed to justice". Similarly, Wilson J. observed in Kosmopoulos v. Constitution Insurance Co., that the law on when the corporate veil can be pierced "follows no consistent principle. The best that can be said is that the 'separate entities' principle is not enforced when it would yield a result 'too flagrantly opposed to justice, convenience or the interests of the Revenue': L.C.B. Gower, Modern Company Law. [Citations omitted.][^7]

[36] In Shoppers Drug Mart Inc. v. 6470360 Canada Inc.[^8] the court of appeal noted:

Typically, the corporate veil is pierced when the company is incorporated for an illegal, fraudulent or improper purpose. But it can also be pierced if when incorporated “those in control expressly direct a wrongful thing to be done”: Clarkson Co. v. Zhelka at p. 578.

[37] In my view, the “wrongful thing” was the misrepresentation of the status of construction to induce the plaintiffs to pay money which they were under no obligation to pay. Until now, I have not focused with any particularity on Roy’s conduct. I find Roy as liable as Rob. Roy was the directing mind of the Corporation. Rob reported to him. Roy could be expected to be aware of the terms of the contract with the plaintiffs. This was a company that Roy created and of which he retained control. Roy was not an absentee shareholder but was the President, CEO and sole director and was regularly on the premises. Given the small number of contracts on which the Corporation worked at any one time and the fact that no contracts were entered into after the contract with the plaintiffs, I am satisfied on a balance of probabilities that Roy was aware that the plaintiffs were being invoiced for framing and roof trusses when that work had not commenced. At no point did Roy deny knowledge that the plaintiffs were being invoiced for work that had not been commenced.

[38] Instead, Roy and Rob’s primary defence on the merits is the statement in their affidavits to the effect that they always expected that Canada Builds would be able to complete the plaintiffs’ home as scheduled. The defendants note that they were not cross-examined on those affidavits and invoke the rule in Brown v. Dunn[^9] to suggest that the plaintiffs cannot impugn their integrity on this point because they failed to cross-examine on it.

[39] In my view, the statement of the defendants’ subjective beliefs about being able to complete the project in a timely way is irrelevant to the issue of civil fraud. The test for fraud here is not that the defendants took the plaintiffs’ money without any intention of delivering anything in return. The test is substantially lower than that. The test is whether the defendants made a statement that they knew not to be true or that was made with reckless disregard of its truth. That is why I draw a distinction between the first deposit on the one hand and the second and third deposits on the other.

[40] The first deposit was due at the time the contract was signed. The only representation at issue at that point is whether the defendants could deliver the home by the target delivery date. There is no evidence before me that the individual defendants were aware of facts as of January 28, 2019, that would make that representation untrue. The statements of Rob and Roy to the effect that they believed Canada Builds could complete the homes in time, in the absence of any conflicting evidence, relieves them of personal liability for the first deposit.

[41] The second and third deposits fall into a different category. The contract entitled the defendants to demand the second deposit on the commencement of framing and to demand the third deposit on the commencement of the roof trusses. When each of those invoices was issued, the defendants knew or ought to have known that framing and roof trusses could not be commenced at the time they demanded payment. The invoices were an implicit statement that this work had begun. Rob’s email of March 14 was an express statement that the work would begin the following week even though it could not. Even Rob admits that when he wrote the email, he had no knowledge of the company’s ability to begin framing. That means the statement was, at a minimum, made with reckless disregard to its truth.

[42] In my view, piercing the corporate veil to hold Rob and Roy personally liable is appropriate in these circumstances. The principle behind separate corporate personality is to promote investment by limiting shareholder liability to their investment in the corporation. Businesses fail for a myriad of reasons for which we do not hold shareholders responsible because doing so would inhibit investment. Well-intentioned investment ideas turn out to be unsuccessful, changes in the economy or consumer preferences result in plummeting sales, new technologies eclipse the old, a myriad of factors make corporations unable to service their debts. All of those and more are risks from which separate corporate personality protects shareholders, directors, officers, and employees.

[43] Separate corporate personality is not, however, intended to allow the principals of a corporation to make representations that they know to be false in order to induce others to pay money to a corporation that the other person is under no obligation to pay. This is so even when the false statement is made in an effort to keep the company afloat.

[44] The personal defendants submit that the statement of claim does not properly plead the facts or theories on which the plaintiffs seek to hold Rob and Roy liable.

[45] Rob and Roy point to paragraph 24 of the statement of claim which states:

The Plaintiff's plead that the Defendants have acted fraudulently in demanding the Payments despite having no intention to fulfill their obligations under the APS.

[46] The defendants submit that this was the basis of fraud in the statement of claim and that the defendants have refuted it through the affidavits of Rob and Roy referred to above. This reads the statement of claim too narrowly. The statement of claim goes on to say:

26. At all material times, the Defendants knew, or ought to have known, that they were not capable of completing the Project by July 2019. Further, the Defendants were aware that they were not in a position to start framing of the Project, yet still demanded payment of the second installment from the Plaintiffs.

27. As a direct result of the Defendants' representations, the Plaintiffs were caused to act. Specifically, the Plaintiffs made prompt Payments as directed by the Defendants.

[47] These paragraphs put the representations squarely at issue.

[48] The defendants further argue that fraud must be pleaded with particularity and that defendants should not be taken by surprise at trial. They note that the statement of claim does not plead fraud with the requisite degree of particularity because, among other things, it does not distinguish between the acts or liabilities of the individual defendants. They rely in particular on the statements of Labrosse J.A. in 460635 Ontario Limited v. 1002953 Ontario Inc.,[^10] to the effect that:

As correctly pointed out by counsel for the appellants, the parties to a legal suit are entitled to have a resolution of their differences on the basis of the issues joined in the pleadings. A finding of liability and resulting damages against a defendant on a basis that was not pleaded in the statement of claim cannot stand. It deprives the defendant of the opportunity to address that issue in the evidence at trial.

[49] It is the last sentence of the quotation that that is particularly relevant to this case. In the circumstances of this case, the defendants have not been deprived of any opportunity to address the issues that the plaintiffs raise and cannot claim surprise. This motion for summary judgment was initially returnable in January 2022. On the return date, the defendants obtained an adjournment from Morgan J. because the plaintiffs’ factum pled fraud against the individual defendants and sought to pierce the corporate veil as a basis of attaching personal liability against them. Those issues had not been raised before. Morgan J. adjourned the motion to October 20, 2022, to allow the defendants to respond to these new issues. The defendants had 10 months to respond but filed no additional materials although they did conduct additional examinations of the plaintiffs. The factum on which the plaintiffs relied before me was delivered to the defendants on or about December 3, 2021.

[50] The critical issue underlying the adequacy of a pleading is that the defendants have notice of the claims against them.

[51] The defendants had notice of the plaintiffs’ entire case as of December 3, 2021, when they received their factum. Although some of the allegations in the factum may have been new as of December 3, 2021, they were 11 months old by the time the motion was argued. This gave the defendants more notice of the claims against them than they would ordinarily have at trial. Notice at trial depends in large part on the questions a defendant asks of the plaintiffs on examination for discovery. The defendants had far more than that here. They had the plaintiffs’ full factual case and their complete legal argument. They nevertheless failed to file any further responding materials.

[52] The plaintiffs also claim $50,000 in punitive and aggravated damages. I decline to award punitive damages in this case. This is not a case where the defendants took the plaintiffs money with the intention of giving them nothing in return. This is a case of a business that collapsed and individuals who, in an effort to ward off that collapse made false representations. While that practice is not to be condoned, it is adequately sanctioned and has sufficient deterrent impact if the individuals are held personally liable for the consequences of those statements.

[53] The plaintiffs also claim $7,000 for storage fees that they incurred as a result of having purchased chattels with Rob’s encouragement in anticipation of the house being constructed. Although those chattels were ultimately used in a replacement house that the plaintiffs built, they incurred and storage costs during the prolonged construction period.

Conclusion

[54] For the reasons set out above I find:

a. Canada Builds liable to the plaintiff for the sum of $276,861.05[^11]

b. I find Robert Graham and Roy Graham personally liable to the plaintiffs for the sum of $147,824.09.

[55] The plaintiff seeks costs on a partial indemnity scale of $41,814.33 and on a substantial indemnity scale of $61,592.70. Those costs are lower than the costs that the defendants would have sought had they been successful.

[56] I note, however, that the real issue at before me involved the liability of the individual defendants. The plaintiffs were partially successful on that point. They achieved 53.4% of the recovery they sought. I would award the plaintiffs their partial indemnity costs fixed at 53.4% for a total of $22,328.85 including disbursements and HST.

Koehnen J.

Released: October 31, 2022

[^1]: Paulus v. Fleury, 2018 ONCA 1072, 430 D.L.R. (4th) 760

[^2]: ADGA Systems International Ltd. v. Valcom Ltd., 1999 1527; 117 O.A.C. 39, 168 D.L.R. (4th) 351.

[^3]: Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club, 2002 SCC 19, [2002] 1 S.C.R. 678.

[^4]: Ibid. at para. 39. Also adopted and followed by Perell J. in Holley v. The Northern Trust Company, Canada, 2014 ONSC 889, 10 C.B.R. (6th) which was cited by the parties.

[^5]: Kripps v. Touche Ross & Co., 1997 2007 (BC CA), 1997 33 BCLR (3d) 254 at para 102

[^6]: 642947 Ontario Ltd. v. Fleischer, 2001 8623 (ON CA), 2001 209 DLR (4th) 182; 2001 8623.

[^7]: Ibid. at para 67.

[^8]: Shoppers Drug Mart Inc. v. 6470360 Canada Inc. (Energyshop Consulting Inc./Powerhouse Energy Management Inc.), 2014 ONCA 85, 372 DLR (4th) 90.

[^9]: Browne v. Dunn (1893) 1893 65 (FOREP), 6 R. 67, H.L.

[^10]: 460635 Ontario Limited v. 1002953 Ontario Inc., 1999 789 (ON CA), [1999] O.J. No. 4071, 127 O.A.C. 48; 1999 789.

[^11]: $269,861.05 for breach of contract but plus $7,000 for storage costs.