Norwich Orders: February 2014

The Norwich Pharmacal Order: A Primer  

 By Reid Lester  

A Norwich Pharmacal Order is an equitable order which allows a plaintiff to obtain pre-action production of documents  in order to enable the plaintiff to identify a potential defendant, or to identify the existence or destination of funds.  Essentially, the principle behind the Order is that it would require that a third party respondent (i.e. like a bank)  disclose certain documents or information to the applicant while keeping the existence of the Order secret from any  other parties (such as potential defendants). The respondent must be a party who is involved or mixed up in a  wrongdoing, whether innocently or not, and is unlikely to be a party to the potential proceedings (i.e. like a bank whose  customer maintains an account into which stolen funds were deposited).  

A Norwich Order is an extremely useful tool for, among other things, obtaining a fraudster’s bank account information in  advance of a law suit and without the fraudster’s knowledge. This in turn can allow a victim/plaintiff to identify stolen  funds and to trace such funds in other assets, thereby enabling the plaintiff to freeze such assets. Such information  can also allow the victim to prove the fraud (more fully than would otherwise be the case) and to identify other potential  defendants. A couple case studies, set out below, illustrate just how useful this order can be, in the right  circumstances.  

1. Malevolent Mike

Mike was the Purchasing Manager for a large office supplies company, ABC Ltd. His employer purchased large  amounts of copy paper to use as a base ingredient in the manufacturer of many of these office products. One of  Mike’s main responsibilities was to source the paper from a variety of paper brokers and manufacturers. He had  authority on behalf of ABC to issue purchase orders to these agents and manufacturers, and he also had authority to  approve the resulting invoices. 

Mike almost always acted in respect of purchases; rarely was he involved in sales – with one exception. From time to  time, ABC had left-over product from discontinued product lines, and in this situation, it was ABC’s practice to “unload”  this material by selling it off to liquidation companies. Sammy owned just such a liquidation company and he regularly  bought end-of-the line product from ABC and in doing so, his contact at ABC was Mike.  

In 2010, Mike’s manager learned of some highly suspicious transactions. While Mike had approved for payment  certain invoices in respect of copy paper, and had signed the “receiving” slips, acknowledging receipt of this paper, the  paper could not be located at ABC’s premises. ABC’s file copies of the invoices stated that the product was to be  “shipped to” ABC. In the course of subsequent investigation, XYZ obtained duplicate copies of the relevant invoices  from the manufacturers. These invoices showed that the “ship to” location was Sammy’s company. When initially  confronted with this information, Mike made various excuses and stonewalled. When confronted with additional  information as it became available, he abruptly resigned from the company.  

This was all compelling stuff and it appeared that what we had was a phoney invoice scheme where the inside  employee manipulated his employer’s records so that the employer would pay for product that had been shipped to the  outside fraudster company/person. Normally, the employee in such a scenario would profit in one of two ways: (i)  either he had an interest in the outside company so that the theft of the paper would provide a benefit to him; or (ii) the  outside fraudster would pay kick-backs of some kind to the employee.  

It is always easier to prove a fraud and to obtain judgment if you can demonstrate a flow of money from a third party to  the dishonest employee. The courts have been clear that any surreptitious dealings between an employee of a  company and someone who does business with the company (a “vendor”), represents a fraud on the employer and will normally be a breach of fiduciary duty. Similarly, any secret payment made by the vendor to the employee will  constitute a “bribe”. There is no defence to these allegations other than the payments were made with full and fair  disclosure to the employer: see my case of Enbridge v. Marinaccio et al 2011 ONSC 2313 in which we obtained  judgment in respect of breach of fiduciary duty and bribery. 

We carried out assets searches of Mike and Sammy and found that they owned houses, jointly with their spouses.  These houses had sufficient equity to warrant the litigation expense, so we moved for and obtained a Norwich Order.  The resulting bank records showed that Sammy made extensive payments to a sole proprietorship registered in Mike’s  name. Both that business account and one of Mike’s personal accounts had significant balances which we were  subsequently able to freeze. Once we served them with our orders and our claim, both Mike and Sammy protested  that they were legitimate business people carrying on a legitimate trade and their business activities were no one’s  business but their own. They challenged the legitimacy of our evidence of fraud, and made up excuses to explain away  the compelling evidence of fraud. And none of it mattered: once you have the bank records showing the secret  payments, there is no defence. It took a while, but eventually we convinced the defence lawyers that Mike and Sammy  were “going down” and we settled out. In the Enbridge case (referred to above), the lawyers did not accept our  arguments and we successfully moved for judgment (and were upheld on appeal).  

2. Brazen Bruno

In 2011, an anonymous whistle-blower came forward to the XYZ City government and complained that a senior  employee, Bruno, was inappropriately involved with one of the City’s paving contractors, Mr. Bitumen, owner and  principal of “Bitumen Paving Inc”. The whistle-blower advised that Bruno’s son worked for Bitumen and had the use of  one of Bitumen’s pick-up trucks. He advised that Bruno had just bought a new Porsche for himself (which he could not  afford on his City salary), and he advised that Bitumen had done some paving work on the driveway, at Bruno’s home.  Most importantly, the whistle-blower suggested that Bruno was approving pumped-up invoices. 

Bruno’s position with the City was such that the allegations of the whistle-blower were treated very seriously. For one  thing, Bruno had complete control over the tender process by which Bitumen had obtained his paving contract for the  past 10 years. Bruno was also in charge of inspecting the work done by Bitumen and of approving Bitumen’s invoices.  

The City’s paving contractors charge both for their time and for the quantity of asphalt used. The price per tonne of  asphalt is one of the items that go into each contractor’s tender bid. On each of his invoices, Bitumen expressly set  out, and charged for the quantity of asphalt used on each job.  

The City required that asphalt laid by any paving contractor be to a depth of roughly 1.5 inches; i.e. 0.04 metres. This  was the industry standard. It is a rough rule of thumb in the paving industry that one metric tonne of standard asphalt  covers about 10 square metres of surface area, to a depth of 0.04 metres. Thus, 100 square meters of surface area  requires about 10 tonnes of asphalt to cover to a depth of 0.04 metres. This is an approximate value but it makes it easy to review invoices for accuracy; you simply divide the number of square metres by 10 to get the approximate  tonnage of asphalt required. Thus, to pave 200 square metres of area, you need roughly 20 tonnes of asphalt, and so  on. 

As part of its investigation, the City reviewed all of the Bitumen invoices that Bruno had approved over a period of  years. It found many instances where the invoices were transparently “pumped-up”, so that, for example, in one case,  a Bitumen invoice referred to 80 square metres of surface area, but charged for 25 tonnes of asphalt, when it should  have been 8 tonnes. In another case, the invoice referenced 120 square metres of paved area, and Bitumen had  charged for 35 tonnes, when it should have been 12. And on, and on. And Bruno had approved these invoices, and he  had to know that this was wrong.  

Armed with this evidence and with certain surveillance, we jumped into court and obtained a Norwich Order. The  results were spectacular!

First, we found that Bitumen had made payments in the hundreds of thousands of dollars over a ten year period to four  separate companies controlled by Bruno or his family members. We had not known about these companies before.  For the reasons set out above, this information about the payments was enough for the City to obtain judgment, since  the existence of any secret payments and of any secret business dealings between a company’s employee and an  external vendor doing business with the company, was irrefutable evidence of breach of fiduciary duty, and of bribery.  The only defence for such activities is that the employee and the vendor made full disclosure to the principal. In this  case, of course, Bruno and Bitumen had taken active steps to conceal their activities. As soon as I saw the bank  statements setting out the payments, I knew we had them.  

A finding of liability is one thing, but what about the money? We wanted to prove the quantum of the loss, but we also  wanted to locate funds and assets that we could freeze as part of our recovery. Well, before we started our litigation,  we had carried out asset searches, so we already knew where Bruno and Bitumen lived, and that they owned these  houses with their spouses. We knew that we could freeze those houses and that this would provide some security for  the legal costs involved in our obtaining the Norwich Order. However, when we obtained the account statements for  the various “Bruno” companies, we found that the current balances in these various accounts totalled to over  $200,000! There was more though. We saw numerous transfers out of these accounts to certain other accounts.  When we obtained the details on these other accounts, we found that they were investment accounts, also controlled  by Bruno and his family, also with balances in the six figures!  

Finally, the account statements revealed a payment to a lawyer which turned out to be a substantial down-payment for  the purchase of his daughter’s house. When a party can trace stolen money into a house or other real property, the  courts will find that such properties are held “in trust” for the victim of the fraud (to the extent of the investment of  stolen funds, either on the basis of a charge, or on the basis of a pro rata share of the equity, whichever is more  advantageous). This is true even if the legal owner of the house had no knowledge of, and was not involved in the  fraud (unless that person paid full market value for the property). In the present case, Bruno had provided a $75,000  gift, of dirty money, to help his daughter buy a house. She was apparently unaware of the fraud, but because she was  not a “bona fide purchaser for value”, in the eyes of the court, she was a “constructive trustee” who was obliged to  account to the City for this portion of the stolen money. 

In this case, therefore, the Norwich Order provided us with the full proof of wrong-doing on the part of Bruno and  Bitumen – the secret payments by Bitumen to Bruno, through the companies – and the quantum of the secret  payments was helpful in establishing the total quantum of the loss. The order also enabled us to locate large amounts  of funds that were still held in various accounts, and it identified the daughter’s house as a further source of recovery  (and the daughter as a defendant whom we had to add to our action).  

Armed with this information, we jumped back into court and obtained a Mareva injunction, allowing us to freeze the  houses and all of the bank and investment accounts. Once we presented all this to Bruno and Bitumen (and Bruno’s  family members), through their lawyers, they had little choice but to settle out with us, on very favourable terms.  

The Test for A Norwich Order  

The Ontario Court of Appeal in GEA Group AG v. Ventra Group Co.1 has recently clarified the test for a Norwich Order, as  follows:  

▪ Has the applicant provided evidence sufficient to raise a valid, bona fide or reasonable claim? 

▪ Has the applicant established a relationship with the third party from whom the information is sought  such that it establishes that the third party is somehow involved in the acts complained of? 

▪ Is the third party the only practicable source of the information available? ___________________________________

▪ Can the third party be indemnified for costs it is exposed to as a result of the disclosure? 

▪ Do the interests of justice favour the obtaining of the disclosure? 

The Court of Appeal noted in GEA Group that while a Norwich Order is an equitable, discretionary and flexible remedy, it  is also an intrusive and extraordinary remedy that must be exercised with caution. The Court of Appeal made it clear  that a Norwich Order may be appropriate to allow for pre-action discovery in aid of a Mareva injunction order and/or a  tracing situation. As such, where a plaintiff can demonstrate a strong prima facie case in fraud, where the fraudster is  not yet aware of the plaintiff’s recovery efforts, and where it would otherwise be impossible to obtain, for example, the  fraudster’s bank records (since any request for such records made to the fraudster would necessarily “tip” him off to  the underlying recovery action, thereby enabling the fraudster to deplete or hide assets), then it is open to the Court to  grant such an Order.  

As with any motion made without notice, it is imperative that the moving party make full and fair disclosure in the  affidavit materials, and the failure to do so is itself, sufficient grounds for setting aside the Order. 

Obviously, a Norwich Order made in the context of an underlying fraud claim would be made on a without notice basis.  The courts will often allow that the Order may be kept in force and secret from the fraudster for a period of 60 days, and  this period may sometimes be extended.  

Conclusion  

A Norwich Order is an extraordinary remedy which can be extremely useful. Before granting such an Order, the courts  require well-drafted and careful affidavit evidence setting out essentially a strong prima facie case in fraud. For this  reason, it can sometimes be somewhat expensive at first instance to obtain such an order (and normally, a litigant  would not want to undertake such a venture unless an asset investigation revealed that the fraudsters had at least  some assets available for seizure). However, fraud files can often be complicated and messy affairs. Sometimes 

fraudsters are unrepentant, and if they choose to do so, they can drag out litigation for months or years. Fraudsters will  also often try to dissipate assets once they realize that their victims intend to sue for recovery. In the right  circumstances, a Norwich Order can provide at a very early stage of the litigation the perfect evidence to prove liability,  to identify assets for recovery, and ultimately, to lead to a fast, cost-effective and satisfactory result.  

1 These case studies are based on real life examples, but are “composite” in nature; meaning, each case study reflects  facts from more than one real-life file.