A Guide to Targeting Directors Personally for Fraudulent Misrepresentation

Q: Can I sue a director for deceit if my contract has a clause saying I didn't rely on any pre-contractual representations?

These clauses, often called 'entire agreement' or 'non-reliance' clauses, can make a claim more difficult, but they are not an absolute defence against a fraud claim. The courts have consistently held that a party cannot contract out of its own fraud. If you can prove the director knowingly made a false statement to induce you into the contract, a non-reliance clause is unlikely to protect them from a deceit claim.

John Merlo
2 days ago
16 min read

For Queensland property developers, the nightmare scenario is all too common: a builder makes bold promises about timelines, financial stability, and capabilities, only for the project to derail, leaving you with massive losses. When the builder's company inevitably folds, the corporate veil feels less like a business structure and more like a trapdoor, leaving you with no viable path to recover your damages.

With nearly $40 billion in unfinished construction work recorded in Queensland in late 2023, the financial pressure on builders is immense, creating a fertile ground for over-promising and misrepresentation. This article outlines a powerful but underutilised legal strategy to bypass the insolvent corporate entity and hold the individuals responsible—the directors—personally accountable for their fraudulent statements through the tort of deceit.

This guide will explore the significant property developer risk associated with builder insolvency and how to navigate complex construction disputes by understanding the limits of the corporate veil in cases of fraudulent misrepresentation.

Key Takeaways

Bypass Corporate Protection: The common law tort of deceit allows you to sue directors personally for fraudulent statements, bypassing the limited liability protection of their (potentially insolvent) company.
Knowledge is Key: A successful deceit claim hinges on proving the director knew their pre-contractual representation was false or was recklessly indifferent to its truth. This is a higher bar than standard misrepresentation.
New Legislative Risks: The Property Law Act 2023 and its Seller Disclosure Scheme (from 1 August 2025) create new statutory risks, making accurate representations more critical than ever for developers and directors.
Strategic Advantage: Unlike claims in negligence, a proven fraud claim sidesteps the proportionate liability provisions in the Civil Liability Act 2003, allowing you to hold a fraudulent director personally liable for the full extent of the damages.

When the Corporate Veil Becomes a Trapdoor

Understanding Your Legal Arsenal: Beyond a Simple Breach of Contract

When a construction project fails, the most obvious legal claim is for breach of contract. However, when the building company is insolvent, this claim is often worthless. To secure a meaningful remedy, developers must look beyond the contract to the pre-contractual conduct of the directors. This involves understanding the distinct legal claims available, including actions under Australian Consumer Law and the powerful common law tort of deceit.

Differentiating Breach of Contract from Misrepresentation

It is crucial to distinguish between a breach of contract and a pre-contractual misrepresentation. A breach of contract occurs when a party fails to fulfil its obligations under the contract—for example, by performing defective work, failing to meet agreed timelines, or abandoning the site. This claim is made against the company that is a party to the contract.

In contrast, misrepresentation involves false statements of fact made before the contract was ever signed, which induced you to enter into it. These statements might relate to the company's financial health, its experience with similar projects, or the qualifications of its team.

While a breach of contract claim is tied to the corporate entity, a fraudulent pre-contractual misrepresentation can be tied directly to the individual director who made the false statement, opening the door to personal liability.

The Role of Australian Consumer Law (ACL)

A common pathway for addressing misrepresentation is through the Australian Consumer Law (ACL), which is Schedule 2 of the Competition and Consumer Act 2010 (Cth). Specifically, Section 18 of the ACL prohibits a person from engaging in conduct that is "misleading or deceptive or is likely to mislead or deceive" in trade or commerce. This provides a broad, statutory basis for a claim against both the company and potentially the individuals involved.

However, a key feature of an ACL claim for misleading conduct is that it does not require proof of intent to deceive. The conduct itself is the focus. While this makes it a versatile tool, it can be less potent than a deceit claim when specifically targeting a director's personal assets, as the remedies may be apportioned differently and the moral culpability is not as central to the claim.

Introducing the Common Law Tort of Deceit

The tort of deceit is a specific, targeted legal action for fraud. It is a common law claim, meaning it arises from centuries of judicial precedent rather than a specific statute. Deceit is distinct from both breach of contract and ACL claims because its core element is proving the defendant's knowledge of the falsehood and their intention to deceive.

This focus on fraudulent intent is what makes it such a powerful weapon. It allows a plaintiff to pierce the corporate veil and attach personal liability directly to a director who has acted dishonestly, making their personal assets available to satisfy a judgment.

The "Director Target" Strategy: What is the Tort of Deceit?

The "Director Target" strategy leverages the tort of deceit to hold a director personally liable for losses caused by their fraudulent statements. This legal strategy is not about simple mistakes or optimistic projections; it is about conscious dishonesty and requires a high standard of proof. Success hinges on demonstrating fraudulent intent, which, if proven, bypasses the corporate structure and exposes the director's personal assets.

Defining the High Bar of Fraudulent Intent

A claim in deceit is harder to prove than one for negligent misstatement or misleading conduct, but it yields a much more powerful result. The legal strategy requires demonstrating that the director made a representation knowing it was false, without belief in its truth, or recklessly indifferent as to whether it was true or false.

This is a critical distinction. The law is not targeting a director who was merely negligent, mistaken, or overly optimistic. It targets conscious dishonesty or a reckless disregard for the truth. Proving this fraudulent intent is the key to unlocking personal director liability.

Why It Bypasses the Corporate Structure

A fundamental principle of corporate law is that a company has a separate legal personality, distinct from its directors and shareholders. This "corporate veil" normally protects directors from personal liability for the company's debts.

However, a tort is a civil wrong committed by a person. When a director, in their personal capacity, makes a fraudulent statement to induce a developer into a contract, they are personally committing the tort of deceit. The claim is against them as an individual wrongdoer, irrespective of the company's involvement or its subsequent insolvency. The corporate structure does not shield an individual from liability for their own fraudulent acts.

Illustrative scenario: A developer is considering hiring a builder for a multi-million dollar project in Brisbane. The builder's director, Luke, provides a personal guarantee and a statement of financial position showing significant net tangible assets for his company. He assures the developer his company has a strong balance sheet and has never had issues with the Queensland Building and Construction Commission (QBCC). The developer signs the contract based on this assurance of financial stability.

The project collapses, the company enters liquidation, and it's discovered the financial documents were knowingly falsified by Luke to win the contract and that the company had multiple prior directions to rectify from the QBCC. While the company is worthless, a deceit claim can target Luke's personal assets to recover the developer's losses because he personally committed the fraudulent act.

The Critical Element of Reliance

To succeed in a deceit claim, it's not enough to show a false statement was made; you must also prove you relied on it.

The process of establishing reliance begins by showing that the director made a clear, unambiguous representation of fact. Following this, the developer must demonstrate that this specific representation was a material factor that induced them to enter into the contract. It doesn't have to be the sole reason, but it must have played a real and substantial part in the decision-making process.

Evidence such as emails questioning the builder's finances, meeting minutes where the representation was discussed, or internal diary notes showing the statement was considered are crucial to proving this essential element.

Building Your Case: The Four Pillars of a Deceit Claim

Successfully proving deceit in litigation requires a methodical approach focused on establishing four key legal elements. This process involves extensive evidence gathering and a deep understanding of how pre-contractual representations are scrutinised by the courts. Each pillar must be constructed with solid evidence to build an irrefutable case against the director personally.

Pillar 1: A False Representation Was Made

The foundation of any deceit claim is proving that a false representation was made. This representation must be one of past or existing fact. It cannot be a mere "puff" (like "we are the best builders on the Gold Coast") or a statement of future intention, unless it can be proven that the director never actually held that intention at the time of making the statement.

Representations can be made in various forms:

Expressly in writing: This is the clearest form of evidence, such as falsified financial statements, an inaccurate company profile, or an email falsely claiming the company holds specific licences required by the QBCC.
Orally: Statements made during negotiations or site meetings, such as untrue claims about past project successes or the availability of key personnel.
By conduct: For example, presenting a show home with high-end finishes while intending to use inferior materials in the actual build.

The key is to identify a specific, factual statement that can be proven to be untrue.

Flowchart titled "The 4 Pillars of a Deceit Claim" with stages: False Representation, Knowledge of Falsity, Intention to Induce, Resulting Damage.

Pillar 2: The Director Knew It Was False

This is often the most challenging yet crucial pillar to establish in a deceit claim. Constructing a successful argument here is vital, as direct evidence of a director's state of mind—a confession of dishonesty—is exceptionally rare. Therefore, knowledge must typically be inferred from the surrounding circumstances.

A court can infer knowledge if it can be shown that the director:

Had actual knowledge that the statement was false.
Had no belief in the truth of the statement.
Made the statement recklessly, without caring whether it was true or false.

Evidence to support this can include demonstrating that the director ignored multiple internal warnings from staff, was in possession of financial reports or other documents that directly contradicted their claims, or had a clear and compelling motive to deceive, such as impending company insolvency.

Expert Insight: Proving a director's knowledge often involves a forensic examination of their communications and business records. We look for the "smoking gun"—the internal email, the suppressed report, or the cooked books that prove they knew the reality was different from the picture they painted for our client. It's about demonstrating a conscious decision to mislead.

Pillar 3: The Director Intended You to Act on It

The plaintiff must demonstrate that the director made the false statement with the intention of inducing them to enter into the construction contract. This element is often more straightforward to prove than knowledge, as it can be inferred from the context of the negotiations.

When a director makes representations about their company's financial stability, experience, or capabilities during a tender process or pre-contractual discussions, the natural and obvious purpose of these statements is to win the project. The intention is to persuade the developer to rely on those statements and sign the contract.

Pillar 4: You Suffered Damage as a Result

Finally, you must prove a causal link between the fraudulent representation and the financial loss you suffered.

The process of quantifying damages starts by establishing this direct connection: "Because I relied on the director's false statement about their company's solvency, I entered into this contract and subsequently lost money when the company collapsed." From there, the task is to calculate the full extent of these losses. This could include the increased cost of engaging a new builder to complete the project, the costs associated with rectifying defects left by the original builder, lost rental income or profits due to delays, and legal costs.

The objective in a deceit claim is to be put back in the financial position you would have been in had the deceitful conduct never occurred. For guidance on navigating these complex commercial disputes, expert legal counsel is essential.

How New Disclosure Laws Raise the Stakes for Directors

The legal landscape in Queensland is undergoing a significant transformation that will amplify the personal risk for directors making representations in property transactions. The introduction of the Property Law Act 2023 (QLD) and its mandatory Seller Disclosure Scheme mark a pivotal shift away from the old "buyer beware" doctrine, placing a much heavier burden of transparency on sellers and developers, and creating new avenues for misrepresentation risk.

The Shift from 'Buyer Beware' to Mandatory Disclosure

Historically, Queensland property law operated under the principle of "caveat emptor," or "buyer beware." This placed the onus on the buyer to conduct their own due diligence and uncover any potential issues with a property.

The new paradigm being introduced by the Property Law Act 2023 (QLD), fundamentally alters this dynamic. The upcoming Seller Disclosure Scheme, set to take effect on 1 August 2025, will mandate that sellers (including developers) provide prospective buyers with a comprehensive disclosure statement and relevant prescribed certificates before a contract is signed. This scheme requires the upfront disclosure of a wide range of specific information, shifting the legal burden of transparency squarely onto the seller.

What Happens if a Disclosure Statement is Inaccurate?

An inaccurate disclosure statement is a legal minefield for a director. The new Act provides buyers with statutory termination rights if the seller fails to provide the statement or includes information that is inaccurate in a material respect.

This creates an immediate contractual risk. More importantly for the purposes of a fraud claim, if a director knowingly signs off on a disclosure statement containing false or misleading information to secure a sale, that document becomes a clear, documented piece of evidence. It can be used to powerfully establish the foundational elements of a deceit claim—a false representation made in writing with the clear intention of inducing the buyer to act.

This significantly lowers the evidentiary bar for proving the first and third pillars of deceit, exposing the director to immense personal liability.

Warning: The Seller Disclosure Scheme is a significant legislative change. Directors who treat these new obligations as a mere box-ticking exercise are exposing themselves to immense personal risk. A knowingly false statement in a statutory disclosure document is a powerful piece of evidence in a fraud claim. Understanding Queensland’s construction law framework has never been more critical.

Why a Deceit Claim is Your Strongest Weapon

In the complex world of construction litigation, choosing the right cause of action is a critical strategic decision. While claims for breach of contract or misleading conduct under the ACL are common, a claim in deceit offers unique and powerful advantages, particularly when dealing with an insolvent company and a dishonest director. This litigation strategy can be your strongest weapon for achieving a meaningful financial recovery.

Escaping the Chains of Proportionate Liability

One of the most significant legal advantages of a deceit claim lies in its ability to sidestep proportionate liability. Under the Civil Liability Act 2003 (Qld), when a claim for economic loss is brought for a failure to take reasonable care (i.e., negligence), liability is divided among all responsible parties. This means a court will apportion liability based on each party's percentage of fault.

For example, if a certifier, an engineer, and a builder were all found to be negligent, a developer might only recover a fraction of their total loss from each party.

Crucially, the Act contains explicit carve-outs for claims arising from conduct that was done with an intent to deceive or defraud. A successful deceit claim proves exactly that. This means the fraudulent director cannot hide behind the negligence of others. They can be held personally liable for 100% of the developer's loss, regardless of whether other parties also contributed to the damage through their own negligence.

This prevents the director from diluting their responsibility and significantly increases the chances of a full recovery for the developer.

Access to a Wider Range of Damages

The rules for calculating damages also differ significantly between contract law and the tort of deceit, often in the plaintiff's favour. In a breach of contract claim, damages are typically limited to losses that were reasonably foreseeable at the time the contract was made. This can exclude unforeseen consequential losses that arise from the breach.

In the tort of deceit, the legal test is much broader. The fraudulent director is liable for all losses that flow directly from their fraudulent inducement, even if those losses were not foreseeable. This can include trading losses, lost profits on the development, and other significant consequential damages that might not be recoverable in a simple contract claim. This expanded scope of recoverable damages makes deceit a far more comprehensive tool for making the victim whole.

The complexity of quantifying these damages is a key reason for seeking strategic litigation advice.

Real-World Consequences and Judicial Precedent

The Queensland construction industry is notoriously volatile, and the high volume of disputes underscores the risks faced by developers. Judicial precedent and regulatory statistics paint a clear picture: misrepresentation and fraudulent conduct are serious issues with significant financial consequences, and the courts are prepared to hold wrongdoers accountable.

The Volume of Disputes Highlights the Risk

The sheer number of conflicts in the industry creates a fertile ground for dishonest players to thrive. According to its own data, the Queensland Building and Construction Commission (QBCC) finalized 5,886 building dispute cases in the 2023-2024 financial year alone—a 34.6% increase from 4,374 cases in 2013-2014. This statistic is a stark indicator of the systemic issues and financial pressures that can lead unscrupulous operators to make false promises to secure work.

For developers, this high-dispute environment makes robust legal strategies not just advisable, but essential for survival. It also means that many disputes will end up before the Queensland Civil and Administrative Tribunal (QCAT) or the courts.

Lessons from Recent Court Rulings

Recent court rulings demonstrate a clear willingness from the judiciary to award substantial damages for property-related misrepresentation and fraud.

Example: The courts are taking property-related misrepresentation seriously. In the Key to Australia Pty Ltd case, a Gold Coast company and its sole director were conjointly ordered by the Southport Magistrates Court to pay $1,573,601.98 in compensation to 18 consumers for making false and misleading representations about land subdivision potential under the Australian Consumer Law. The director, Graham Scarrott, and his company falsely told investors that residential lots had Gold Coast City Council approval to be subdivided when no such approval existed or had been sought.

Similarly, in State of Queensland v Morecroft & Anor [2024] QCA 11, the Queensland Supreme Court ordered the state government to pay $2.7 million in compensation to a Gold Coast couple who lost their home due to mortgage fraud committed by a third party. When the State appealed, the Queensland Court of Appeal dismissed the appeal and upheld the compensation order, reinforcing the judiciary's commitment to protecting victims of fraudulent conduct in the property sector. These cases underscore the power of pursuing claims grounded in misrepresentation and fraud.

Protecting Your Development: A Proactive Legal Strategy

While the tort of deceit is a powerful tool for recovery, the best strategy is always to mitigate risk and avoid disputes in the first place. A proactive legal approach, combining rigorous due diligence with expert advice, is the most effective way to protect your development and investment.

The Importance of Pre-Contractual Due Diligence

A developer's first line of defence is thorough pre-contractual due diligence. This process should begin with independently verifying all significant claims made by a builder's director. Do not simply take their word for it. Check their QBCC licence history, conduct searches on their company and directorship history, and ask for references from previous projects.

Crucially, you must document every material representation made in meetings, phone calls, emails, and formal documents. This meticulous record-keeping creates a clear evidence trail that can be used to either clarify misunderstandings and prevent a dispute, or form the backbone of a powerful deceit claim if things go wrong. This documentation is also vital when considering your rights for terminating construction contracts.

When to Engage a Specialist Lawyer

Legal advice should be sought at the first sign of trouble, not as a last resort when the project has completely unravelled. Early intervention allows a lawyer to help preserve critical evidence, issue strategic notices to the builder, and position your case for maximum leverage should litigation become necessary.

A specialist building and construction lawyer can quickly identify the markers of potential fraud and provide an early assessment on whether the high evidentiary bar for a deceit claim can be met. This strategic advice can save you significant time and resources by ensuring you pursue the most effective legal pathway from the outset.

Final Thoughts

In a high-stakes industry plagued by financial pressures and a high dispute rate, property developers cannot afford to rely solely on the solvency of a builder's company. The tort of deceit provides a direct line of attack against directors who knowingly make false promises to win contracts.

By understanding its elements and strategically building a case, you can pierce the corporate veil and hold the true wrongdoers personally accountable. At Merlo Law, we specialise in navigating these complex claims to protect our clients' significant investments, leveraging our expertise to achieve results.

FAQs

What is the difference between fraudulent misrepresentation (deceit) and negligent misrepresentation?

The key difference is the state of mind of the person making the statement. Fraudulent misrepresentation (deceit) requires proof that the director knew the statement was false or was recklessly indifferent to its truth. Negligent misrepresentation only requires proof that the director owed a duty of care and breached it by making a false statement carelessly, without needing to prove dishonesty. The bar for proving deceit is higher, but the legal remedies, particularly regarding personal liability and damages, are more powerful.

Can I sue a director for deceit if my contract has a clause saying I didn't rely on any pre-contractual representations?

These clauses, often called "entire agreement" or "non-reliance" clauses, can make a claim more difficult, but they are not an absolute defence against a fraud claim. The courts have consistently held that a party cannot contract out of its own fraud. If you can prove the director knowingly made a false statement to induce you into the contract, a non-reliance clause is unlikely to protect them from a deceit claim.

How long do I have to bring a deceit claim in Queensland?

In Queensland, the Limitation of Actions Act 1974 generally provides a limitation period of six years for tort claims, including deceit. However, section 38 contains a critical postponement provision for fraud cases: the limitation period does not begin to run until the plaintiff has discovered the fraud (or could with reasonable diligence have discovered it), rather than from the date of the fraudulent act itself. This means the six-year clock only starts ticking from the date of discovery or reasonable discoverability of the fraud, providing plaintiffs with significantly more time to bring claims when fraud has been concealed. It is critical to seek legal advice as soon as you suspect fraud to ensure you maximize your window for bringing a claim.

What kind of evidence is most effective in a deceit claim against a director?

The most effective evidence is contemporaneous written documentation. This includes emails where the director makes specific factual claims, falsified financial reports or project histories provided during tender, meeting minutes that record the representations, and your own diary notes. Evidence showing the director was in possession of information that contradicted their statements (e.g., internal reports showing financial distress) is particularly powerful for proving knowledge of the falsity.

Is a deceit claim handled by the QBCC or does it have to go to court?

A common law claim for the tort of deceit is a matter for the courts, not the QBCC. While you might have a separate complaint process with the Queensland Building and Construction Commission (QBCC) regarding the builder's conduct or defective work, a deceit claim for damages against a director personally must be filed in a court with the appropriate jurisdiction (e.g., the District or Supreme Court of Queensland, depending on the amount claimed).

This guide is for informational purposes only and does not constitute legal advice. For advice tailored to your specific circumstances, please contact Merlo Law