Canada: More Than "Lip Service" To Limited Liability: Personal Liability Of Directors And Causation Of Damages For Misrepresentation To Investors

Last Updated: April 8 2013
Article by Timothy Froese

Most Read Contributor in Canada, September 2018

Will a director or officer of a corporation or limited liability partnership be personally liable for the losses of investors who relied upon his or her inaccurate statements when deciding to invest in a corporate venture? What if the inaccurate statements did not involve matters that were proven to cause the investment losses?

The Alberta Court of Appeal recently considered these questions when overturning a trial decision which had held the directors of a failed slate quarry personally liable to investors for negligent misrepresentation. Hogarth v. Rocky Mountain Slate Inc., 2013 ABCA 57, emphasizes the importance of respecting the limited liability of those involved in the operations of corporations, and cautions against too readily finding the human agents of a corporation personally liable for torts committed while carrying out its business.

Although all three Justices of the Court of Appeal agreed that the appellant director was not liable for misrepresentations made in the name of and for the benefit of the corporation, the Court was split on the issue of whether those misrepresentations caused the investors' losses. As a result, this case offers an interesting discussion of two alternative approaches to the calculation of damages for misrepresentation to investors.

Background

The appellant, a director, officer and shareholder of Rocky Mountain Slate Inc., was involved in efforts to raise funds to develop a quarry by promoting units in a limited partnership. To that end, the appellant helped prepare certain promotional materials and spoke to potential investors. The quarry failed in its first year of operation, resulting in the loss of the plaintiffs' investments.

The trial judge found that the promotional materials contained material inaccurate representations concerning the management team's qualifications to develop and operate a quarry. She further found that those misrepresentations caused the plaintiffs' losses, because they would not have subscribed to limited partnership units "but for" the inaccurate statements. The corporation and three defendant directors were held jointly and severally liable for negligent misrepresentation. The directors were personally liable on the basis that the misleading statements they made to investors constituted stand-alone tortious conduct. Damages were awarded for the entire amount of the plaintiffs' lost investment plus interest. Only one director, Mr. Simonson, appealed.

The Decision

The trial decision was overturned on appeal. The panel, Justices O'Brien, Rowbathom and Slatter, agreed that Mr. Simonson's conduct was not tortious in itself, and did not exhibit a separate identity or interest from the corporation. The impugned representations were made for the purpose of raising funds for the venture. Mr. Simonson's financial interest in the corporation as an officer and shareholder did not in itself give rise to a separate identity. The majority followed the Alberta Court of Appeal's previous decision in Blacklaws v. Morrow, 2000 ABCA 175, leave refused [2001] 1 S.C.R. vii.

Justice Slatter, who concurred in the result, undertook a more extensive analysis of the leading cases regarding the circumstances in which an individual may be personally liable for torts committed while conducting corporate business. He found the jurisprudence, and even the approach to follow, to be "not entirely consistent" and "unclear". He concluded that the appellant should not be personally liable because, among other things, the principles of limited liability and the expectations of the parties did not support a duty of care to the investors.

Justice Slatter also departed from the majority's reasoning with respect causation of damages. He held that the general law of causation in a claim for economic loss requires a two-step process. An investor seeking relief for negligent misrepresentation must demonstrate that:

  1. "but for" the representation, the investment would not have been made; and
  2. the damage would not have resulted if the representation had been accurate.

Justice Slatter maintained that a defendant would only be liable for the plaintiff's loss if both tests were met.

He concluded that the only misrepresentation disclosed by the evidence at trial concerned the involvement of a mining engineer on the management team. However, there was no evidence that the absence of the mining engineer caused the failure of the quarry, and by extension the plaintiffs' losses. As such, there was no proven causal link between the misrepresentation and the damage suffered. Justice Slatter asserted that under the general rules of causation, only losses that result from the defendant's negligence are recoverable. Losses due to external causes are not. The plaintiffs had failed to prove that their investments would not have been lost if the representations concerning the mining engineer were true. The plaintiffs were therefore unable to meet the second part of the two-step test, and could not establish the causation necessary to render Mr. Simonson liable for their investment losses, even had he not been protected by the principle of limited liability.

Justices O'Brien and Rowbotham were reluctant to discuss causation, as they decided the appeal on the narrower ground of the personal liability of directors. However, in view of Slatter, J.A.'s extensive discussion of the issue, the majority held that the trial judge correctly found that the plaintiffs need only prove that they invested the monies after relying upon the misrepresentations. If the investment itself was caused by the misrepresentation, and the damages were reasonably foreseeable, that was held to be sufficient causal link to ground liability.

In summary, while all three Justices concurred in overturning the trial decision, the majority did not adopt Slatter J.A.'s formulation of the two-step causation test for negligent misrepresentation.

Potential Significance

This decision clarifies the circumstances in which directors, officers or other individuals engaged in unintentional tortious conduct in the course of their duties to the corporation, and whose tortious conduct is indistinguishable from that of the corporation, should not be personally liable. Supported by Slatter, J.A.'s survey of the leading jurisprudence, it highlights the imprecise and "artificial" nature of certain attempts to distinguish the torts of a corporation from those of its human agents. Justice Slatter, in particular, appears to defend against a tendency for courts to pay "lip service" to the concept of separate corporate personality, while demonstrating "little real recognition of it in the ultimate decisions." In this respect, this decision reinforces the policy reasons underlying the limited liability of individuals involved in the business of the corporation, thereby bolstering this "essential tool of social and economic policy."

The second noteworthy line of discussion, the causation of damages from pre-contractual representations, can be a significant issue in economic loss cases such as securities class actions. The Alberta Court of Appeal divided over the question of whether an investor can recover all foreseeable losses as long as the investment was caused by the misrepresentation, or if recovery also requires a causal connection between the misrepresentation and the type of loss. This question does not merely go to the existence of damages for misrepresentation, but also their extent. This distinction was not material, as the appeal was decided on narrower grounds. But it remains to be seen whether the force of Slatter, J.A.'s reasoning on this point will bear any influence should the matter be squarely addressed in the future.

Case Information

Hogarth v. Rocky Mountain Slate Inc.,2013 ABCA 57

Docket: 1201-0029-AC

Date decided: February 15, 2013

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