Canada: Claim Of Vicarious Liability For Negligent Misstatement, Fraud And Insider Trading Dismissed By Alberta Master

Last Updated: June 5 2013
Article by Don McGarvey, Q.C.

In a case that upholds the Supreme Court of Canada's notion that there is no presumption that the scope of an employee's authority includes the commission of unlawful acts, an Alberta Master has summarily dismissed a case based in vicarious liability.

A husband and wife, the Hendricksons, invested in a company known as Reserverlogix Corporation. What could be described as insider tips were given by certain insiders to the Hendricksons to the effect that during certain drug trials, Reserverlogix, a pharmaceutical company, would be taken over by the end of 2007, thereby significantly increasing its share price. While the sale failed to materialize, the Hendricksons purchased more shares, some of which were purchased on a margin account that was eventually called. The Hendricksons eventually sued and claimed damages of $263,000 for the loss on their share purchases and also claimed loss of opportunity in the sum of $2.5 million.

The Hendricksons claimed that the insiders, including McCaffrey, a director and Chief Executive Officer of Reserverlogix, fraudulently, or in the alternative, grossly negligently, or in the further alternative, negligently misrepresented certain matters in relation to the underlying value of the shares of the company. The Hendricksons claimed to have relied upon McCaffrey and the information provided by him and other insiders about the health and prospects of Reserverlogix. Reserverlogix, while distancing itself from the insiders, brought an Application for Summary Judgment in Masters Chambers. In doing so, it relied upon an Affidavit of its Chief Financial Officer which indicated, among other things, that Reserverlogix "... did not condone, permit or allow McCaffrey to make any actionable comments to the Hendricksons, nor could it have benefited from such statements". Further, there was no pending takeover and whether there was or not, trading on insider information was prohibited by the company as set out in its policies and transmitting insider information formed no part of McCaffrey's duties. Making such comments were in fact illegal and constituted insider trading. The volume of trading of shares in Reserverlogix, a public company traded on the Toronto Stock Exchange, was such that the transactions of the Hendricksons would not have affected either the price or the appearance of the volume of trading.

The Master found that providing insider information was an unlawful act prohibited by the Criminal Code. The company's evidence that it did not authorize McCaffrey to commit this unlawful act was uncontroverted. No evidence, surprisingly, was filed by the Hendricksons in relation to the Summary Judgment Application.

The question upon which the decision turned was whether the company, Reserverlogix, could be vicariously liable for unauthorized, illegal activities of its employees.

The Supreme Court of Canada in Bazley v. Curry, established a two-part test for determining when unauthorized acts would result in employer liability. The first step is to look at judicial precedent to determine whether the case has already been determined by precedent. If there is no precedent, the Court should consider whether the imposition of liability would serve policy purposes. There are three types of policy purposes.

The first is where the employee was acting in furtherance of the employer's aims and therefore had ostensible or implied authority. The second is where the nature of the business and the employee's position can put him or her in a situation of friction where a tort may be committed, such as a bartender who must deal with obnoxious clientele. In such a situation, the resultant liability is essentially a cost of doing business and will be borne by the employer. The third is where an employee is dishonest or fraudulent, such as a bank employee who steals from a customer of the bank.

The Master in Hendrickson v. Reserverlogix borrowed from Bazley v. Curry in finding that: Where the employee's conduct is closely tied to a risk that the employer's enterprise has placed in the community, the employer may justly be held vicariously liable for the employee's wrong.

The Court also considered policy in determining whether it seemed "just" to place liability for the wrong on the employer.

Where vicarious liability is not related to a risk introduced or enhanced by the employer, it serves no deterrent purpose to place liability on the employer. To do so relegates the employer to a status of an involuntary insurer.

In this case, the Court observed that there is no case that holds that a company is deemed to have authorized the illegal acts of its director or CEO. As noted by the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., there is no presumption that the scope of his employee's authority includes the commission of unlawful acts. Insider trading was not seen as a generally foreseeable cost of the business of Reserverlogix.

As such, the Master could find no rationale to require Reserverlogix to bear the loss occasioned by a rogue employee who gave information to third parties to improperly use it for their own gain and then seek reimbursement when the illegal scheme does not bear fruit. The Court found that there was no triable issue as to the vicarious liability of Reserverlogix and dismissed the case. The decision has not been appealed.

There are numerous policy and other considerations that a Court must determine when assessing vicarious liability but this case goes some distance to demonstrating that where illegal or unauthorized tortious acts are committed by an employee and are not condoned by the company or related to its business, it will be difficult to find the employer vicariously liable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Don McGarvey, Q.C.
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