Western Canada Business Litigation Blog

How do the courts allocate loss amongst innocent victims of a fraud?

Posted in Civil Litigation
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Fraudsters are very clever. Many set up elaborate commercial transactions for the purpose of absconding with someone else’s money.  By the time the scheme is discovered, an innocent victim is usually out of pocket, often for large sums of money. In an effort to recover that loss, the victim often turns to other innocent parties who were unknowingly involved in the deal and seeks to impose the loss on them. The courts are left with the invidious task of deciding who, among these innocent litigants, should bear the loss. How do they make that decision?

The short answer is that it is usually entirely dependent on the facts of each case. It is those facts which define the legal principles that will provide the answer. A recent Alberta case provides a common example. The case involved paying out a mortgage debt with the payment being made to a company, Fuoco, that held itself out as agent for the lender. Once paid, the company and its principal disappeared with the cash. The lender, a Mr. Currie, was left to go after his borrowers, the Craigs, and their lawyer who made the payment to the fraudster at the fraudster’s direction. Mr. Craig also sought to assert his mortgage security still had priority over the mortgage the Craigs granted to TD Bank, some of the proceeds of which had been used to pay the fraudster (and purportedly discharge Currie’s mortgage).

The legal answer in this case turned on the law of agency and, in particular, the actual or implied authority of the fraudster, as agent, to act on Currie’s behalf. As a general rule, where an agent acts within their actual authority, the principal is bound by those acts, even if fraudulent. However, where an agent has gone rogue, most principals argue the agent was either not their agent at all or, more commonly, acted outside their authority. Mr. Currie did so in this case. As a result, the legal question then became whether Fuoco had “ostensible authority” to act for Currie. As a matter of law, the answer depends on whether the principal has, by words or deeds, held out their agent as having the authority to do the challenged act. In other words, did the agent have “ostensible authority.”

In making that decision, the Alberta court relied on the following propositions:

  1. Representations about the authority of an agent must come from the principal; an agent cannot clothe themselves with authority;
  2. The onus is on the party relying on the act of the agent to prove ostensible authority; and
  3. When an agent has actual authority, but that authority is subject to limitations, the onus is on the principal to prove that the limitations were conveyed to the third party who relied on the agent.

Relying on those propositions, the Alberta court found that the fraudster, Fuoco, had the ostensible authority to accept payment of the mortgage debt from the Craigs’ lawyer. As a result, Currie was the innocent party who bore the resulting loss, not the Craigs, their lawyer or TD Bank. This finding was based on specific facts, including that Currie:

  • allowed Fuoco to negotiate the original loan with the Craigs;
  • allowed Fuoco’s address to be used on the mortgage documents;
  • signed off on and allowed Fuoco to provide mortgage payout statements; and
  • did not voice any objection to or place any limit on Fuoco’s conduct with any third party, including the Craigs or their lawyer.

Based on this, the Alberta court found the Fuoco also had “ostensible authority” to receive payments on the mortgage debt and to do so in Fuoco’s name.

The underlying lesson here is that any principal should be cautious when clothing an agent with any authority to act on their behalf. Pay close attention to what your agent is doing and who they are dealing with on your behalf. Had Mr. Currie been paying closer attention to what Fuoco was doing, he would likely not have fallen victim to this fraud