Fridays with Rogers Partners

At our weekly Friday meeting, Nasra Esak discussed the recent Court of Appeal decision of Ontario v. Madan, 2023 ONCA 18. The Court of Appeal upheld a motion judge’s decision to strike contested paragraphs of the appellants’ statements of defence counterclaims, which alleged that the Government of Ontario was vicariously liable and contributorily negligent for fraud allegedly committed against them by their employee.

BACKGROUND

The respondents, His Majesty the King in Right of Ontario (“Ontario”), sued Sanjay Madan (Sanjay) and alleged that Sanjay used his senior IT position at the Ontario Ministry of Education (Ministry) to defraud Ontario of millions of dollars. Ontario also sued Sanjay’s wife and sons, and alleged that they were complicit and unjustly enriched in the fraud. Ontario alleged Sanjay committed two fraudulent schemes.

The first scheme was through the Support for Families Program (SFFP), which was a program to support families with the costs of at-home learning due to the pandemic. The SFFP provided grants of $200-$250 per student, based on an online application. Sanjay developed the computer application for the program. Ontario alleged that between April 2020 to August 2020, Sanjay made thousands of fraudulent payments through the SFFP using fictitious names and funds in excess of $10.8M, which were approved and paid into over 2,500 bank accounts opened by Sanjay in his name, or in the name of the other appellants.

In the second scheme, Ontario alleged that Sanjay was paid kickbacks for at least 10 years from consultant vendors who obtained contracts with the Ministry. Sanjay was responsible for selecting vendors and signing off on consultants’ timesheets. Ontario also alleged that the other defendants were unjustly enriched at Ontario’s expense through the kickback scheme. They alleged that Sanjay diverted the funds, directly and indirectly, to the defendants through money payments or through property/assets.

In their Statement of Claim, Ontario alleged fraud, theft, and conversion against Sanjay and the other defendants. Sanjay, his wife, and his sons were all represented by the same lawyer, however the parties filed separate Statements of Defence.  Sanjay denied every allegation in the Statement of Claim, and denied that his wife and sons had any knowledge of the alleged fraud.

Sanjay’s wife and sons pled that they had no knowledge or involvement in the fraudulent schemes. They also pled that Ontario was contributorily negligent and failed to take reasonable steps to limit the fraud committed by Sanjay, and that Ontario’s damages should be reduced to reflect its responsibility. Sanjay’s sons pled that, without their knowledge or consent, Sanjay deposited the fraudulent funds into bank accounts in their name. Sanjay’s wife pled that she was a victim of Sanjay’s fraud. Neither his wife nor sons filed a crossclaim against Sanjay.

Ontario successfully moved to strike the contributory negligence and vicarious liability defences and counterclaims in the Statements of Defence, except for the wrongful dismissal claim made by Sanjay. The motion judge also refused leave to amend the pleadings. Sanjay’s wife and sons appealed the motion judge’s decision.

ISSUES

The appellants raised five issues on appeal:

1. The motion judge erred in striking the contributory negligence defences.
2. The motion judge erred in striking the claims in the statements of defence and counterclaims relating to Ontario’s alleged misuse of a Mareva injunction.
3. The motion judge erred in striking the allegation in the counterclaims that Ontario was vicariously liable for Sanjay’s invasion of the appellants’ privacy.
4. The motion judge erred in striking the allegations in the counterclaims that Ontario was either directly or vicariously liable to the appellants in negligence.
5. The motion judge erred in not granting leave to the appellants to amend their pleadings.

COURT OF APPEAL ANALYSIS

The appellants’ appeal was dismissed. The Court of Appeal provided the following reasons:

1. The contributory negligence defence

The Court of Appeal stated that the contributory negligence defences advanced by the appellants were based on their position that Ontario failed to take reasonable steps to protect itself from the fraud perpetuated against it. The Court disagreed with this argument and held that allowing the defence would suggest that crime would pay and unjustly punish organizations who failed to protect themselves. To this, the Court reiterated:

[19] … [A] victim’s negligence or carelessness affords no defence, partial or otherwise, to an allegation of dishonesty

The appellants also argued that even if Ontario was able to establish that they were entitled to equitable relief through unjust enrichment, the appellants were entitled to keep at least some of the indirect proceeds of Sanjay’s fraud due to Ontario’s failure to take reasonable steps to protect itself from the fraud. The Court rejected this argument, stating that they were unaware of any equitable principle to justify the bystanders of the fraud becoming the beneficiaries of a windfall, while the victims of the fraud suffer a permanent financial loss.

2. The Mareva injunction

Ontario obtained an ex parte Mareva injunction and preservation order in October 2020. The appellants in their Statements of Defence and counterclaims alleged that Ontario seized or froze funds to which Ontario had no entitlement and abused the authority given to it by the Court. As a result, the appellants pleaded that they were entitled to damages.

The Court of Appeal held that these pleadings were properly struck, primarily due to the lack of material evidence provided by the appellants to substantiate their claims. Furthermore, the Court held that there was no reference in the appellants’ pleadings to the actual terms of the Mareva injunction, nor any allegations that Ontario violated the terms of their court order.

3. The intrusion upon seclusion claim

The appellants pled that Ontario was vicariously liable by allowing its employee access to its computer networks and failing to apply appropriate safeguards, thus giving Sanjay the means and opportunity to commit identity theft and fraud. They also pled that Ontario was vicariously liable for Sanjay’s intrusion upon seclusion of the appellants by both the misuse of the appellants’ private information to open fraudulent bank accounts, and causing the proceeds from the SFFP program to be deposited into those accounts. The appellants alleged that Sanjay’s dishonest use of this information to establish and deposit fraudulent accounts was an infringement of their right to control their private information.

The Court of Appeal affirmed the test for intrusion upon seclusion is met when the alleged tortfeasor invades or intrudes upon the private affairs or concerns of another. The invasion or intrusion must be intentional or reckless, and it must be sufficiently serious that a reasonable person would regard the invasion of privacy as highly offensive causing distress, humiliation, or anguish[1].

The Court held Ontario could only be vicariously liable if they were legally responsible for Sanjay’s misuse of the appellants’ private bank information to establish the fraudulent accounts. However, the Court noted that nothing in the appellants’ pleadings supported this.

Citing Bazley[2], employers can only be held liable when the acts of the employee fall within the ambit of the risks that the employer’s enterprise creates or exacerbates. The Court found that the risk Sanjay would have misused the private banking information entrusted to him by his family was not a risk that Ontario’s enterprise created or exacerbated. Ontario had not provided Sanjay with the private information of the appellants, but the appellants themselves due to their familial relationship. As such, the Court found there to be no connection between Sanjay’s employment with Ontario and his wrongdoing underlying the intrusion upon seclusion claim.

4. The negligence claims

The appellants pleaded that a direct duty of care arose between them and Ontario by virtue of Ontario’s transfer of funds into bank accounts in the name of the appellants. The appellants also pled that Ontario was vicariously liable for the negligent actions of its employees.

The Court of Appeal held that the motion judge correctly struck the direct negligence claims against Ontario, affirming that the Crown cannot be directly liable in tort. As held in Section 8 of the Crown Liability and Proceedings Act[3], the Crown can only be liable for actions or omissions committed by an officer, employee, or agent of the Crown.

Regarding the appellants’ allegations of Ontario’s vicarious liability in negligence, the Court confirmed that the relationship giving rise to the requisite proximity must be one between the identified employee of Ontario and the appellants. However, the appellants did not plead the existence of a requisite proximity between an employee of Ontario.  Instead, they pled a “special relationship” with Ontario. The Court affirmed that the transfer of funds into accounts in the appellants’ name could not, on its own establish a requisite proximity, especially considering that they claimed to have no knowledge of the existence of the fraudulent bank accounts opened in their names. As held by the Court:

[65] …..The mere fact that Ontario and the appellants were both cheated by Sanjay as part of the same scheme cannot create a “special relationship” giving rise to a duty of care owed to the appellants by any officer, agent, or employee of Ontario

5. Should the Appellants Have Been Granted Leave to Amend Their Pleadings

The Court of Appeal held that most of the deficiencies in the appellants pleadings were not amenable, as they were not legally tenable claims. To the extent that any of the pleadings may be amendable, the Court of Appeal held that they would defer this to the motion judge’s discretion.

CONCLUSION

The appeal was dismissed, and the Court of Appeal upheld the motion judge’s decision to strike the contributory negligence and vicarious liability defences and counterclaims. Ontario’s costs were fixed at $35,000.

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[1] Jones v. Tsige, 2012 ONCA 32, 108 O.R. (3d) 241, at para. 71; Owsianik v. Equifax Canada Co., 2022 ONCA 813, at paras. 53-54

[2] Bazley v. Curry, [1999] 2 S.C.R. 534

[3] Crown Liability and Proceedings Act, 2019, S.O. 2019, c. 7, Sched. 17