Summary:

The Ontario Superior Court of Justice recently released its summary judgment motion decision in Allen v. Aspen Group Resources Corporation.1 This decision has opened the door to legal partnerships being found vicariously liable for the acts of a partner in his or her capacity as an outside director or officer.

Facts:

Aspen Group Resources Corporation completed the take-over of Endeavour Resources Inc. pursuant to an offer and take-over bid circular ("Circular") dated November 23, 2001. Wayne Egan, a partner at WeirFoulds LLP, acted as counsel for Aspen in the preparation of the Circular.  Mr. Egan was also one of Aspen's directors.

Endeavour's security holders alleged that Aspen made misrepresentations or failed to disclose material facts in the Circular and that they were entitled to a statutory remedy for misrepresentation pursuant to section 131 of the Ontario Securities Act against the directors of Aspen. On December 4, 2009, the Endeavour security holders were certified as a class action.

The plaintiff also claimed that WeirFoulds was negligent in the preparation of the Circular and failed to ensure that it disclosed material facts.  In addition, the plaintiff alleged that WeirFoulds LLP was liable for Mr. Egan's negligence and breach of s. 131 of the Securities Act.

One of the issues raised in the summary judgment motion was whether WeirFoulds LLP was vicariously liable for Mr. Egan's liability, if any, under the Securities Act.

The Decision:

The motion for summary judgment on the common law negligence issue was dismissed.  Justice Strathy concluded that determining whether a duty of care existed is a complex, nuanced and important question.  He held that he was unable to obtain a full appreciation of the evidence or fairly resolve this issue without a trial.

In reviewing the motion for summary judgment on the statutory remedy issue, Justice Strathy reviewed the purpose behind s. 131 of the Securities Act. This section provides the security holder of an offeree with a cause of action for misrepresentation against an offeror's director where a take-over bid circular is sent to its security holders.  Justice Strathy, in his review of the history of s. 131 of the Securities Act, noted that its purpose was to protect the interests of shareholders of the offeree by ensuring that they received adequate time, adequate information and equal treatment from any bidder.  To ensure that directors of the offeror exercise reasonable diligence in ensuring a circular is accurate, they are personally liable for any misrepresentations in a circular (subject to a due diligence defence).

Justice Strathy concluded that imposing liability on those who employ a director or who are in partnership with the director is in keeping with the purpose of the Securities Act as it promotes the goals of compensation, loss distribution and risk management and fulfills the purposes of the Ontario Partnerships Act. 

In coming to this conclusion, Justice Strathy rejected the argument that expanding the statutory liability of directors to the firms in which they are partners would have a "chilling effect" on lawyers' willingness to act as directors.  On the contrary, Justice Strathy concluded that it would result in a sharing of the risk and responsibility between the lawyer and his or her law firm and would provide greater protection for the public by putting the risk on the party most able to control and insure it.  Justice Strathy decided this issue without prejudice to the right of WeirFoulds to raise the issue at trial. 

Conclusion:

LawPRO does not insure directors or the alleged vicarious liability of a legal partnership for the director's acts.  Therefore, the final disposition of these issues at trial will likely have a significant impact on the future of lawyers acting as director for a client.  In the interim, law firms may want to revisit the scope of the indemnity provided by a client to ensure that it applies to the partnership as well.  Depending on the final outcome of this case, and despite Justice Strathy's assertion that no "chilling effect" would be seen, it would not be surprising to see firms decide to limit or otherwise restrict partners from acting as directors on their clients' boards.

A similar "chilling effect" may also be seen beyond the legal profession.  Partnerships and corporations (such as accounting firms) who employ people who act in the ordinary course of the firm's business when taking a seat at the boardroom table may likewise find themselves vicariously liable for the negligent acts of their employees.  

Footnote

1. 2012 ONSC 3498.

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