Ontario Fraudulent Misrepresentation: Elements, Rescission, and Damages

The Classic Definition: Derry v Peek

The foundational statement of fraudulent misrepresentation in the common law comes from the House of Lords in Derry v Peek (1889) 14 App Cas 337. Lord Herschell defined fraud as a false representation made: (1) knowingly, (2) without belief in its truth, or (3) recklessly as to whether it is true or false.

This definition has been applied consistently in Ontario. A person who makes a statement believing it to be true, however unreasonable that belief may be, does not commit fraud — the tort requires dishonesty (knowing falsity or recklessness, not mere negligence). The distinction between recklessness and negligence is critical: a person who honestly does not turn their mind to whether the statement is true may be negligent but is not fraudulent; a person who makes the statement with conscious indifference to its truth acts recklessly and commits fraud.

The Five Elements of Fraudulent Misrepresentation

Ontario courts require the plaintiff to establish five elements on a balance of probabilities:

1. A False Representation of Fact

The misrepresentation must be a statement of fact, not a statement of opinion, intention, or future prediction. A representation that a company's revenues were $X is a statement of fact. A representation that revenues will reach $X next year is a prediction, not a statement of fact, unless the party making it knew it to be false.

Statements of opinion can constitute fraudulent misrepresentation where the representor does not hold the opinion expressed: if a vendor says "I believe the building is in excellent condition" knowing the building has serious defects, the statement of belief is fraudulent. The statement of belief is implicitly a statement of fact about the state of the speaker's mind.

Puffery — vague and exaggerated promotional statements about quality or value — is not a representation of fact and does not give rise to actionable misrepresentation. Courts distinguish between specific factual claims and general commercial hyperbole.

2. Knowledge of Falsity or Recklessness

The representor must have known the statement was false, have made it without belief in its truth, or have been reckless as to its truth. As Derry v Peek makes clear, gross negligence or unreasonable belief is insufficient — there must be dishonesty.

Recklessness is established where the representor was subjectively indifferent to whether the statement was true or false. A person who states facts without checking whether they are accurate, in circumstances where they were aware they did not know, acts recklessly.

In practice, the mental element is often proved by inference from the circumstantial evidence — the knowledge the defendant had, the steps they took (or failed to take) to verify the statement, and the implausibility of their claimed belief in its truth.

3. Intention to Induce the Plaintiff to Act

The false representation must have been made with the intention of inducing the plaintiff to enter into the contract or take the action that caused the loss. If the representor did not intend the plaintiff to rely on the representation — for example, where a statement was made to a third party and inadvertently came to the plaintiff's attention — the intention element may not be met.

In commercial transactions, the intention element is usually satisfied by the context: a vendor who makes representations in a disclosure document or in negotiations intends those representations to be relied upon by the purchaser.

4. Actual Inducement — The Plaintiff Was Induced to Act

The plaintiff must actually have been induced by the misrepresentation — it must have contributed to the plaintiff's decision to enter into the contract or take the relevant action. The misrepresentation need not be the sole or dominant cause; it is sufficient if it was one of the factors that induced the plaintiff.

Where the plaintiff did not know about the representation, or knew it was false, there is no inducement. A buyer who conducts independent due diligence and discovers the true state of affairs before closing may have difficulty establishing inducement.

5. Resulting Loss or Damage

The plaintiff must have suffered loss as a result of being induced by the misrepresentation. Loss is typically the difference between the price paid and the true value of what was received, plus any consequential losses flowing from the transaction entered into by reason of the fraud.

Remedies: Rescission

Rescission is the primary contractual remedy for misrepresentation — it treats the contract as void ab initio and restores the parties to their pre-contract positions. Rescission is available for all categories of misrepresentation (fraudulent, negligent, and innocent), subject to bars on rescission.

The bars to rescission include:

• Affirmation: The innocent party affirms the contract with knowledge of the misrepresentation — either expressly or by conduct inconsistent with an intention to rescind.
• Lapse of time: For non-fraudulent misrepresentation, delay in asserting the right to rescind can bar rescission in equity. Fraudulent misrepresentation is treated more leniently because the limitation period runs from discovery of the fraud.
• Impossibility of restitutio in integrum: Rescission requires restoration of the parties to their original positions. Where the subject matter has been consumed, substantially altered, or passed to innocent third parties, complete restitution may be impossible.
• Third party rights: Where an innocent third party has acquired rights in the subject matter of the contract, those rights cannot be displaced by rescission.

Rescission is an all-or-nothing remedy — the plaintiff cannot rescind part of a contract and affirm the rest. Where the contract contains multiple components, the court must assess whether the entire transaction was infected by the misrepresentation.

Damages for Fraudulent Misrepresentation

Fraud is a tort, and damages are measured in tort — not contract. The fundamental difference is that tort damages restore the plaintiff to the position they were in before the tort occurred (the status quo ante), not the position they would have been in if the representation had been true (the "expectation" measure of contract damages).

The key advantage of fraud damages over contract damages is that all losses caused by the fraud are recoverable — including losses that are not reasonably foreseeable at the time of the misrepresentation: Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 (adopted in Ontario). This is a significant departure from the remoteness principle that limits contract damages to foreseeable consequences.

In a share purchase or asset acquisition context, fraud damages typically include:

• The difference between the price paid and the true value of what was acquired
• Consequential losses flowing from the transaction — losses of subsequent business opportunities, additional costs incurred in reliance on the representations, and losses from decisions made on the faith of the false information
• Wasted expenditures incurred in reliance on the representation

A plaintiff who rescines the contract and claims damages is entitled to be placed in the position they were in before the fraud — recovering the purchase price paid, less any benefit received. A plaintiff who cannot rescind (because, for example, third party rights have intervened) may still claim damages in tort.

Fraudulent Concealment: Duty to Disclose

A party ordinarily has no duty to disclose information in commercial negotiations — the parties deal at arm's length and each is responsible for their own due diligence. However, fraudulent concealment can give rise to liability where:

• A partial disclosure was made that was misleading without the additional information
• A representation was true when made but became false before the contract was concluded, and the representor failed to correct it
• A fiduciary relationship or special relationship of trust exists between the parties
• A statutory duty of disclosure applies (for example, real estate agent disclosure obligations under the Real Estate and Business Brokers Act)

A half-truth — a statement that is literally true but creates a false impression by omitting material context — can constitute fraudulent misrepresentation. The obligation to not deceive extends to creating impressions through selective disclosure.

Negligent Misrepresentation: Hedley Byrne and Queen v Cognos

Negligent misrepresentation is distinct from fraudulent misrepresentation — it does not require knowing falsity or recklessness, but requires a duty of care arising from a special relationship between the parties. The leading Canadian authority is Queen v Cognos Inc[1993] 1 SCR 87, building on the House of Lords' decision in Hedley Byrne & Co v Heller & Partners [1964] AC 465.

The elements of negligent misrepresentation under Queen v Cognos are:

• There must be a duty of care based on a special relationship between the representor and the representee
• The representation must be untrue, inaccurate, or misleading
• The representor must have acted negligently in making the representation
• The representee must have relied on the negligent misrepresentation and the reliance must have been reasonable
• The reliance must have caused damage

The key differences from fraudulent misrepresentation: negligent misrepresentation requires a special relationship imposing a duty of care; it does not require dishonesty; but damages are limited to foreseeable losses (unlike fraud where all caused losses are recoverable). A plaintiff with strong facts on the mental element will prefer to plead fraud; a plaintiff who cannot establish dishonesty but can establish a duty of care and negligence will plead negligent misrepresentation.

Misrepresentation in Real Estate Transactions

Real estate transactions in Ontario generate a significant volume of misrepresentation claims. Vendors have a qualified duty not to make active misrepresentations about the property — they have no general duty to disclose latent defects, but cannot actively misrepresent the property's condition.

The distinction between patent defects (visible on inspection, risk on purchaser) and latent defects (concealed, risk on vendor who knows) is critical. A vendor who knows of a latent defect and actively conceals it, or makes a positive representation inconsistent with its existence, commits fraudulent misrepresentation.

OREA Agreement of Purchase and Sale representations — about the property's condition, existing contracts, zoning, environmental status, or rental income — are commonly litigated. Misrepresentations in the OREA APS can give rise to rescission and/or damages depending on when the misrepresentation is discovered (before or after closing) and whether merger in the deed bars rescission post-closing.

Post-closing real estate misrepresentation claims are complicated by the rule that contractual obligations in an APS that are not reflected in the transfer deed may merge into the deed on closing. Representation warranties in the APS must be carefully drafted to survive closing if the vendor intends them to persist as contractual representations after title passes.

Limitation Periods for Misrepresentation Claims

Claims for fraudulent misrepresentation are subject to the general two-year limitation period under the Limitations Act 2002 s.4, subject to discoverability under s.5. The limitation clock begins when the plaintiff knew or ought to have known that:

• The injury or loss occurred
• It was caused by the act or omission
• The act or omission was that of the defendant
• A proceeding would be an appropriate means to seek to remedy the injury

Where the fraud was deliberately concealed, the discoverability principle postpones the limitation period until the plaintiff discovered or ought reasonably to have discovered the fraud. The Limitations Act 2002 s.15 ultimate limitation period of 15 years applies subject to the exceptions in that section.

Negligent misrepresentation claims are similarly subject to the two-year discoverability limitation. Innocent misrepresentation giving rise only to rescission may be subject to shorter equitable limitation principles based on laches.