In Century Services Inc. v. New World Engineering Corp., the Ontario Superior Court of Justice held that defendants – found liable for having bilked investors out of $20 million – could not claim contribution and indemnity from their lawyers and the lenders in their scheme. This, despite the fact that the Court concluded that the lenders – and at least a few of the solicitors involved – failed to carry out their due diligence responsibilities.
In 2005 and 2006, Century Services Inc. and Clairvest Group Inc. advanced a number of loans totalling $25 million to New World Engineering Corporation and its principals, John Cheong and Fred Bain. Cheong and Bain represented themselves as a successful engineer and an astute businessman, respectively, and their firm to be a major distributor of large pieces of equipment for factory-related businesses. However, none of this was true. New World was not engaged in any business activities for which the loans were obtained. Instead, Cheong and Bain (and Bain’s partner, Roberto Bustamante) funneled the millions of dollars through a network of bank accounts and corporations. A court-appointed receiver found the funds had been improperly used to invest in a number of failed night club ventures.
The Court held that Cheong and Bain – assisted by Bustamante – fraudulently misrepresented New World and their experience, and were in violation of all of the security arrangements that were to have been in place for the loans. The three defendants were ordered to pay the plaintiffs’ losses, after credit was given for the money paid by the settling defendants, and the money recovered by the receiver. In addition, the Court held that the conduct of Cheong and Bain was so “willfully reprehensible” that $300,000 in punitive damages were awarded to deter others from engaging in similar behaviour.
The Court was also asked to consider whether on the failure of the solicitors and lenders to engage in reasonable due diligence practices would allow the defendants to limit their portion of liability. While the Court acknowledged there could be “rare circumstances” where persons found liable of fraud may rely upon a common law or statutory right to seek contribution and indemnity from others, the “preponderance of authority” holds that “want of care is no defence to fraud”. The Court found that given the magnitude of the fraud perpetrated by Cheong, Bain, and Bustamante, the want of care argument was wholly extinguished and liability was solely attributable to the defendants.
by Matt Saunders & Chanel Sterie (articling student)