IT.CAN Newsletter/Bulletin
March 30, 2017/30 mars 2017

Fraudulent misrepresentation in vaporware software contract

Limitation of liability clause no escape for defendant

In an interesting case from Ontario, Business Development Bank of Canada v Experian Canada Inc., the province’s Superior Court of Justice found that a software developer fraudulently misrepresented “vaporware” and their liability was not saved by a limitation clause.

The Business Development Bank of Canada (“BDC”) issued a request for information for a software system to manage its lending program. Experian Canada and its American parent responded to the RFI and actively participated in the procurement program. The result was a license agreement for a software product that BDC then alleged never actually existed. What was represented was a system that they planned to deliver. BDC sued Experian, alleging fraudulent misrepresentation. Experian counterclaimed for unpaid fees, defended against BDC’s claim and also argued that any liability was capped by a limitation of liability clause in the final contract.

The Court summarized BDC’s claim:

[18] According to BDC, Experian made the following representations regarding its RLS software:

  • It existed as an “out of the box” base product.
  • It was used by over 1,100 financial institutions including two non-US Banks.
  • It had evolved as a whole and would continue to so evolve. Experian’s RLS software had certain specific functionalities and characteristics detailed in Experian’s response to BDC’s RFI.
  • It was adaptable to BDC’s needs with minimal customization.
  • Experian had the skill and experience to implement the RLS software in BDC’s environment and within BDC’s timeline.

[19] BDC submits that none of these representations were true. Experian did not have the software it said it did, with the attributes it said its software had. It only had the hope of developing such software in the future. According to BDC, Experian misrepresented, knowingly and intentionally, that it had a software product that currently existed when it did not.

[20] Because it became clear to BDC in the fall of 2009 that Experian could not deliver on its representations and perform the Agreement, it terminated its dealings with Experian. BDC then had to recommence steps to obtain the new lending software it required. BDC experienced an 18-month delay in achieving the benefits it should have had earlier if Experian had lived up to its representations and had not breached the Agreement.

[21] BDC submits that it suffered damages, as a result of Experian’s fraudulent misrepresentations and breach of the Agreement, of approximately $57 million for its incremental costs of dealing with Experian and its loss of net economic benefits from the 18-month delay it experienced in implementing new lending software. BDC also seeks punitive damages of $500,000 against Experian because BDC alleges that Experian deliberately misled it throughout their relationship, evidenced by Experian’s motto on the project of “fake it until we make it.”

In determining whether fraudulent misrepresentation took place, the Court followed the analysis in Queen v Cognos Inc., which requires the following elements to be proven:

  1. the defendant made a false representation of fact;
  2. knowing that it was false or recklessly without belief in its truth;
  3. with the intention that it would be acted upon by the plaintiff;
  4. which induced the plaintiff to act; and
  5. the plaintiff suffered damages as a result.

The Court found that each element was made out.

First Element

[140] I agree with Experian’s submission that the false representation required for the first element of fraudulent misrepresentation must be the representation of an existing fact not a forecast, estimate or an opinion. Although a forecast, estimate or opinion about a future event cannot constitute a false representation of fact, it is a false representation of fact to state that something is currently true or existing when it is not. The Supreme Court of Canada made this clear in Queen v. Cognos …

[141] In my view, Experian’s employees represented to BDC’s employees that the software described in Experian’s response to BDC’s RFI (RSL 5.1) currently existed when it did not. This was a false representation of an existing fact. This false representation of fact continued until June 5, 2009, when Mr. Daily finally told Ms. Boutin that the base product that had been described in Experian’s response to the RFI did not exist.

[142] I am satisfied that the first element of fraudulent misrepresentation has, therefore, been established.

Second Element

[143] The second element of fraudulent misrepresentation requires that the misrepresentation is made with knowledge that the statement is false or recklessly without belief in its truth. The evidence establishes that when Experian responded to BDC’s RFI, Mr. Daily was aware that RLS 5.1 did not currently exist and was only under development. I am satisfied that he was aware that Experian’s representations to BDC about its base software were not true. At the very least, Mr. Daily was reckless in allowing the representations concerning Experian’s base software to be made to BDC.

...

[145] I am satisfied that the second element of fraudulent misrepresentation has, therefore, been established.

Third Element

[146] The third element of fraudulent misrepresentation requires that the false statement be made with the intention that it will be acted upon. I have already found that Experian’s response to BDC’s RFI was meant to convey the impression to BDC that Experian’s lending software met all of BDC’s requirements when it did not. I am satisfied that Experian’s employees made the false statements about its software with the intention that BDC’s employees would rely upon them and decide to acquire Experian’s software as a result.

[147] I am satisfied that the third element of fraudulent misrepresentation has, therefore, been established.

Fourth Element

[148] The fourth element of fraudulent misrepresentation requires that the false statement induced the plaintiff to act. Ms. Boutin’s evidence, and the evidence of many of the other BDC witnesses, make it clear that BDC was induced to deal and contract with Experian because of the false statements about Experian’s software. According to Mr. Eatock, Experian would not have even made it to BDC’s medium vendor list if the false statements about its software had not been made.

[149] I am satisfied that the fourth element of fraudulent misrepresentation has, therefore, been established.

Fifth Element

[150] The final element of fraudulent misrepresentation requires that the plaintiff suffered damages as a result of the false statement. I accept Experian’s witnesses’ evidence about the delay it experienced in implementing new more efficient lending software because of the 18 months it wasted dealing with Experian. If Experian’s employees had been truthful about the software Experian could deliver, I find that BDC would not have dealt with Experian and would not have entered into the Agreement.

[151] I am, therefore, satisfied that the fifth element of fraudulent misrepresentation has been established.

With fraudulent misrepresentation made out, the Court turned to Experian’s arguments that the damages claimed by BDC were mostly barred by a limitation of liability clause. The clause in question is quoted by the Court at paragraph 165:

20.1 Neither the Supplier or BDC shall, nor shall they purport to, exclude or restrict liability for death or personal injury resulting from its negligence or that of its employees, servants or agents acting in the course of their employment, or resulting from fraud. Nothing in this Agreement will seek to or operate to limit a Party’s liability in respect of liability that cannot as a matter of law be excluded. (emphasis added)

20.2 Except in the case of liability pursuant to

20.2.1 Clause 12.4 (Intellectual Property Right Infringement); or

20.2.2 a breach by Supplier of the obligations of confidentiality in Clause 14,
in respect of which the Supplier’s liability is unlimited, and subject to Clause 20.1, the total aggregate liability of the Supplier under this Agreement in respect of each event or series of connected events relating to any of the Deliverables, Document Deliverables, or Services, regardless of the form of action whether in contract, tort or otherwise:

20.2.3 will not exceed 100% of the Development Charges payable under this Agreement in the case of any event of breach occurring before the first day of the Support Period, and

20.2.4 will not exceed 100% of the Support Charges payable in the Support Year in which the claim accrues in the case of any event of breach occurring on or after the first day of the Support Period.

20.4 Neither the Supplier or BDC shall in any circumstances be liable to the other for the following losses:

20.4.1 lost profits, loss of business, loss of goodwill; or

20.4.2 and indirect or consequential loss,

in each case caused in any way by some act, omission, or misrepresentation (excluding any fraudulent or negligent misrepresentation) committed in connection with this agreement (whether arising from negligence, breach of contract or howsoever), even if such loss was reasonably foreseeable or specifically advised to that Party. (emphasis added)

The Court concluded that there was no limitation of liability as a result based on fraudulent misrepresentation, supported by an apparent admission in oral argument:

[170] During oral argument, Mr. Wall conceded that the limitation of liability clauses do not apply to BDC’s alleged tort of fraudulent misrepresentation.

As a result, the Court found in favour of BDC and awarded damages. Not surprisingly, the parties disputed the calculation of damages. The Court generally preferred the submissions of BDC, but limited the “delay period” to 15 months from BDC’s alleged 18 months:

[189] Considering all of these factors I have concluded that the appropriate delay period that should be used for the time BDC wasted dealing with Experian is 15 months. When Mr. Rosen’s calculation of BDC’s loss of economic benefits is adjusted using a 15-month delay period, BDC’s loss is $41,140,416. In my view this is the most accurate measure of BDC’s damages for its loss of economic benefits arising from Experian’s fraudulent misrepresentations.

[190] There appears to be no dispute about Mr. Rosen’s calculation of the incremental costs incurred by BDC from its dealings with Experian in the amount of $3,307,037. When this figure is added to BDC’s damages for its loss of economic benefits, BDC’s total damages are $44,447,453. This amount is, of course, exclusive of pre-judgment interest.

On the question of punitive damages, the Court declined to grant such an award, concluding that the amount of more than $44,000,000 served the purposes of “ retribution, deterrence and denunciation”.

Maybe You Should Just Un-Friend Him…

Man convicted of uttering threats against PM in Facebook posts

In R. v. Hayes, Judge Ross Green of the Saskatchewan Provincial Court heard the trial of a man charged with uttering threats under s. 264.1 of the Criminal Code. The accused admitted to making two posts on Facebook in March and July of 2016, respectively, each of which contained statements expressing hostility towards Prime Minister Justin Trudeau. In particular, the March post read in part:

Imma buot to go shoot this mother fucker dead….And if the Canadian liberal voters won’t stand up for all fn Canadians and demand better conduct by the Trudeau government I’ll cut off the head if the snake myself and go down in the history books as the man who saves Canada. This asshole is a Muslim who stands against everything western culture in Canada has built and fought for for over a hundred years and I’m sick of watching Trudeau dismantle our country…

In the July post the accused expressed the opinion that the Prime Minister “should be shot dead asap” and that while the accused was not going to do it, he would “personally thank the person who did kill him.”

After the March post the accused was interviewed by an RCMP officer and gave a statement in which he said he was not a violent person and had been drinking when the wrote the post, which was motivated by frustration about the Alberta economy. He said he was “not going to go and do that, obviously,” and upon being told that posts which contained threats to harm or kill someone “crossed the line” into an offence, he replied “I’ll stop those.” The officer exercised his discretion not to charge the accused, believing that he would refrain from most posts. However, the accused was questioned again after the second post, during which he admitted that by wording his post the way he did he was intending to skirt the Criminal Code provision regarding threats. He also admitted that he would personally find the post threatening if it was directed at him or his family, and that he had “crossed a line.” He was charged regarding both posts, and did not testify at trial.

In his reasons, Judge Green began by exploring the law on the offence of uttering threats, drawing on the recent Supreme Court of Canada decision in R. v. McRae. The physical element of the offence is the making of a statement that a reasonable person would perceive to have been threatening in the circumstances; the Crown does not need to prove that the target of the threat was aware of it or, if aware, was intimidated or frightened by it. The mental element is that the accused intended to intimidate or intended the threat to be taken seriously. In this case, it was clear that a reasonable person would find the March posting to be threatening, given that the accused was angry with the Prime Minister and the statement contained an actual death threat. Moreover, “[t]hese posts were, as well, made on the Internet to a Facebook group which included some persons who were of a similar political viewpoint to Mr. Hayes” (para. 37). The July posting, while more indirect, was clearly also threatening.

On the mental element, Judge Green rejected a defence argument that the accused had only intended to express a political opinion and held that the accused had meant both to intimidate the Prime Minister and for the statements to be taken seriously. This was clear from the various statements the accused had made to the officers who questioned him. Judge Green also distinguished an earlier case involving an alleged Facebook threat:

[40] In submitting that there was insufficient proof that Mr. Hayes intended his Facebook posts to be a threat, the defence cited the case of R v Sather. In that case, Mr. Sather made threatening comments on his Facebook page directed both at a local Children’s Aid Society and employees of that Society, whom he blamed for the death of his son. While satisfied that a reasonable person would find these posts to be a threat of serious bodily harm, the judge in Ontario found that the Facebook posts were not meant to intimidate. That was because: (1) expert evidence was called to explain how people use Facebook to embellish their character and create a false persona; (2) the posts were expressions of emotion directed to people who might be sympathetic to Mr. Sather’s anger over the loss of his son; (3) Mr. Sather had numerous direct contacts with employees of the Society and never said anything that might instill fear; and (4) Mr. Sather’s testimony at his trial was accepted by the judge, including his evidence that he made these posts to blow off steam as he had been taught to do in an anger management course.

[41] I, however, am satisfied that the Sather case can be distinguished from that of Mr. Hayes, as no evidence was presented at the trial, either by Mr. Hayes or by an expert on his behalf, to suggest what he intended in making the posts or how he used Facebook or that he had a false persona on Facebook. Nor was there any evidence of any ongoing dialogue between Mr. Hayes and the Prime Minister. While his comments may have been directed on the Internet to a group which included people who shared his political views and frustration, nevertheless it is clear to me that the best evidence of Mr. Hayes’ intent in making these posts is that contained in his two statements he gave to the RCMP, which I have referred to above.

In the result, even though the accused had not intended to kill the Prime Minister, the elements of uttering threats had been proven and a conviction was entered.

Transport Minister grounds most recreational drones

Interim Order prohibits much recreational use of “model aircraft”

On March 13, 2017, without notice, the Minister of Transportation, Marc Garneau issued an Interim Order order under the Aeronautics Act that put the brakes on most recreational use of drones. Until the Interim Order, recreational users of “model aircraft” were subject to a minimal set of legally-enforceable rules and a range of guidelines. The Interim Order gives those guidelines the force of law.

Under the Aeronautics Act, the Minister of Transportation is authorized to make emergency orders to generally “deal with a significant risk, direct or indirect, to aviation safety or the safety of the public.”

The Interim Order prohibits any flight of “model aircraft”

  1. at an altitude greater than 300 feet above ground level;
  2. at a lateral distance of less than 250 feet (75m) from buildings, structures, vehicles, vessels, animals and the public including spectators, bystanders or any person not associated with the operation of the aircraft;
  3. within 9 km of the centre of an aerodrome, which includes all airports, airfields, helipads and bodies of water that are designated for floatplane use;
  4. over any area that is located within 9 km of a forest fire area;
  5. over or within the security perimeter of a police or first responder emergency operation site;
  6. over or within an open-air assembly of persons; or
  7. at night or in cloud.

In addition, no flight is permitted where the drone is more than 500m from the operator.
In effect, the Interim Order only permits recreational drone use to rural areas, well removed from any airports and buildings. It is unclear whether this Interim Order will cease to have effect when final rules are developed to merge the regulation of commercial and recreational drone operations.