Zerbin v Vrbanek, 2021 ABCA 317: The Alberta Court kicks back at a contractor taking kickbacks

( Disponible en anglais seulement )

2 mars 2022 | Bronwhyn Simmons, Ryley Schmidt

In the Alberta Court of Appeal decision, Zerbin v Vrbanek, 2021 ABCA 317 (“Zerbin”), and the preceding trial decision (Zerbin v Vrbanek, 2020 ABQB 797), the Alberta Courts assessed damages against a general contractor who was bleeding the owners on a project for excess funds by illegal means.


The plaintiff owners in this case, David and Barbara Zerbin, wanted to build their “dream home” – a multi-million dollar property – along with a second home on a nearby lot for their daughter. To this end the Zerbins hired DN Developments (carrying on business as Darren’s Homes) and Mr. Vrbanek, the sole shareholder, director, and principal of DN Developments, to provide project management services.  Under the project management agreements, DN Developments was to provide its services on a “cost-plus” basis – there was no hard ceiling on the cost, and DN Developments’ service charge was 20.96 percent.  For the sake of expediency, the Zerbins agreed that DN Developments would handle all payments on their behalf, and DN Developments would invoice the Zerbins for both the work and services provided by sub-trades and suppliers, and for DN Developments’ service charge.

The Court of Queen’s Bench found that DN Developments was experiencing a cash flow problem prior to its retainer by the Zerbins, and Mr. Vrbanek viewed the Zerbins’ project as an enduring source of revenue to keep DN Developments afloat.  The principal of Modern Granite, a supplier on the project, informed the Zerbins that Mr. Vrbanek had asked him to inflate his quotes to the Zerbins and pay a “kickback”.  This revelation caused the Zerbins to request a reconciliation from DN Developments, and when that reconciliation was not received, the Zerbins terminated both project management agreements.

The Zerbins commenced legal action against DN Developments and Mr. Vrbanek, alleging that they had been intentionally overcharged and that the project management agreements were performed dishonestly.  However, before the matter went to trial, DN Developments ceased doing business.  Therefore, the focus of the trial was whether Mr. Vrbanek, as DN Developments’ principal and directing mind, could be held personally liable for the Zerbins’ losses.

The trial judge accepted the Zerbins’ evidence, including that of several contractors, suppliers, and a forensic accounting expert that:

  • Vrbanek did, in respect of Modern Granite and other contractors on the Zerbins’ project, charge and collect from the Zerbins, or attempt to charge and collect, amounts for services and materials in excess of that actually charged by those contractors;
  • DN Developments invoiced the Zerbins for deposits greater than, or not charged by, some contractors;
  • DN Developments, through the issuance of Progress Invoices on both projects, represented to the Zerbins that trades and suppliers had invoiced DN Developments, on behalf of the Zerbins, the amounts shown in the Progress Invoices. They represented that these amounts were truly owed, and that the money paid under each Progress Invoice would be used to fully pay the trades and suppliers whose invoices were included as part of the Progress Invoice. These representations were false.  DN Developments did not pay all of the trades and suppliers whose invoices were included as part of the Progress Invoices and the invoiced amounts were inflated, or higher than what was actually charged;
  • Documents were forged to charge the Zerbins additional amounts and to remove indications that payments had not been received;
  • DN Developments overcharged the Zerbins by $1,447,409 CDN, plus an additional $39,141.41 US, on the two project management agreements; and
  • Following the termination of the project management agreements, the Zerbins paid out $171,409.33 CDN and a further sum of $39,161.50 USD to trades and suppliers for amounts previously invoiced to the Zerbins by DN Developments, which DN Developments did not pay to the trades and suppliers.


The trial judge held that $1.7 million in damages, representing the amount overcharged to the Zerbins and the further amounts paid by the Zerbins to complete the projects, was recoverable from DN Developments on the basis that DN Developments breached its general duty of honesty in contractual performance, as set out by the Supreme Court of Canada in Bhasin v Hrynew, 2014 SCC 71.  Further, the trial judge held that Mr. Vrbanek was personally liable for the $1.7 million in damages on the basis of civil fraud and piercing the corporate veil.

The trial judge cited the Supreme Court of Canada decision of Bruno Appliance and Furniture, Inc v Hryniak, 2014 SCC 8, for the four necessary elements of the tort of civil fraud.  These elements are: (1) a false representation made by the defendant; (2) some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness); (3) the false representation caused the plaintiff to act; and (4) the plaintiff’s actions resulted in a loss. The trial judge also cited the Alberta Court of Appeal in Precision Drilling Canada Limited Partnership v Yangarra Resources Ltd, 2017 ABCA 378, for the principle that if the intention to deceive is a necessary element of the fraud test, it can be inferred through the evidence as a whole, including the lack of a credible explanation for the concealment or false representation by the would-be-fraudster.

The trial judge found that Mr. Vrbanek, as DN Developments’ directing mind, had actual and personal knowledge that: (1) the Progress Invoices represented overcharging, and in some cases gross overcharging; (2) the money was supposed to be used to pay the trades and suppliers who had outstanding invoices under that Progress Invoice; and (3) a significant amount of money received was not used for its intended purpose.  Mr. Vrbanek argued that he had no intention to deceive the Zerbins or cause them a loss, and therefore, the requirement of a false representation was not met.  His evidence at trial was that he planned to do a reconciliation of what was actually owed at the end of the projects. However, Mr. Vrbanek’s inability to explain the forged documentation, false deposits, and reversed payables suggested deceit. Therefore, on the ground of civil fraud, Mr. Vrbanek, as the director of DN Developments, was held to be personally liable for the Zerbins’ losses.

As an alternative approach to finding Mr. Vrbanek personally liable for the Zerbins’ loss, the trial judge found that the corporate veil could be pierced on these facts.  The Court cited the Transamerica Life Insurance Co of Canada v Canada Life Assurance Co (1996), 28 OR (3d) 423 decision for piercing the corporate veil, which has been restated in Arsenault v Arsenault, 1998 CarswellOnt 1488 as follows: (1) The individual exercises complete control of finances, policy, and business practices of the company; (2) that control must have been used by the individual to commit a fraud or wrong that would unjustly deprive a claimant of his or her rights; and (3) the misconduct must be the reason for the third party’s injury or loss.  The trial judge found that the test for piercing the corporate veil was met on the facts.  Mr. Vrbanek exercised complete control and authority over DN Developments’ finances, policy, and business practices, and that control was exercised in a deceitful manner which deprived the Zerbins of their money and was the exact cause of the Zerbins’ loss.

DN Developments and Mr. Vrabanek appealed the trail judge’s decision to award damages against them, but the appeal was dismissed.


It goes without saying that a contractor must not defraud clients, for example by inducing suppliers to baselessly increase their price and then taking kickbacks, or by swearing false declarations about having paid subcontractors who were never paid (and then pocketing the funds). This case illustrates that setting a maximum on a cost-plus contract or hiring an independent third-party consultant to review costs may be a prudent idea when an owner does not have the expertise or time to monitor a contractor’s activities him- or herself. There is no due diligence defence to fraud – a contractor cannot rely on their victim having failed to prevent the fraud as a defence – but a victory in court against an impecunious corporation and potentially its impecunious principal will not restore the defrauded owner’s funds.

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