Canada: Vicarious Liability Of Investment Firm Upheld For Acts Of Sponsored Investment Advisor

Last Updated: June 7 2013
Article by Don McGarvey, Q.C.

In a recent case against an investment advisor and the firm who sponsored his registration to sell mutual funds and other financial products, the Ontario Court of Appeal upheld findings of direct and vicarious liability on a broker/dealer.

In Straus Estate v. Decaire, Decaire, a brother-in-law of the Plaintiff, Straus, acted as the financial advisor to Straus and his wife. Decaire was licensed to sell mutual funds and other products but only for so long as his license was sponsored by FundEX.

Decaire became associated with a stock promoter who was pursuing investment in needle incineration technology. This was not an investment that Decaire was legally permitted to promote but Decaire convinced Straus and his wife to invest in start-up companies associated with this technology.

The investment turned out to be worthless and all that Straus and his wife invested was lost. They sued to recover their losses from not only Decaire but also FundEX and the company who succeeded FundEX in sponsoring Decaire's license to sell financial products.

The trial judge found that Decaire was negligent and ordered damages payable by him and the two investment firms that sponsored his registration. Costs were also awarded.

The trial judge found that the Plaintiffs were unsophisticated investors with only a moderate risk tolerance and minimal knowledge and understanding of investments and securities regulated under the Securities Act.

Despite the terms of the written contract between Decaire and FundEX, in which Decaire agreed he was an independent contractor, the judge concluded that Decaire was an employee. This decision was reached after careful consideration of the distinction between an employee and an independent contractor with particular attention being focused on the various Supreme Court of Canada's decisions on vicarious liability. Decaire was not performing as if he was a person in business on his own accord. He did not hire employees and he worked from an office at FundEX. He was not free to choose his own method of marketing but rather was required to follow FundEX's business model.

FundEX was found to be directly liable for not overseeing the activities of its advisor, Decaire, and failing to recognize that the investment, while "off books", was inappropriate and unsuitable for Mr. and Mrs. Straus. More significantly in relation to this decision, FundEX was found to be vicariously liable for the activities of Decaire while FundEX was sponsoring Decaire's registration. The trial judge found that following FundEX's business model created a risk that Decaire would place FundEX client funds in inappropriate products.

The Ontario Court of Appeal found that there was no reason for appellate intervention as the trial judge had carefully considered the nature of the relationship that existed between Decaire and FundEX.

It is clear that the Court was live to the fact that the wrongful act may have furthered the employer's aims and the activities of Decaire were sufficiently tied to his employment so as to ground vicarious liability on FundEX. There was apparently a sufficient connection between the employment enterprise and the wrong that justified the imposition of vicarious liability according to the principles in Bazley v. Curry as articulated by the Supreme Court of Canada. Obviously, the risk that was introduced or enhanced by the employer created the vicarious liability.

While each case concerning vicarious liability will turn on its own facts, which must each be carefully analyzed in accordance with the principles articulated in several cases arising out of the Supreme Court of Canada. While there is still some room for further development of this area, a good deal of recent case law arising out of financial advisor/investor litigation is bringing more and more clarity to the area all the time.

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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