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
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
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 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.
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'
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.
1. 2012 ONSC 3498.
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