Canada: Personal Liability For Corporate Torts And Crimes

This article was originally published in Blakes Litigation Bulletin September 2004

With respect to these individual actions, the general rule is that individuals are responsible for their own actions. How does one reconcile or characterize the actions of an individual clothed as an officer or director?

In 1920, it was established in the English King’s Bench Decision of Siad v. Butt, that "if a servant acting bona fide within the scope of his authority… he does not thereby become liable to an action of tort…". The upshot of this decision was a recognition that not only did corporations create limited financial liability but could also operate to limit individual liability. The decision did not go so far though as to grant universal immunity with respect to all acts through a corporation.

Piercing the Corporate Veil

The phrase "piercing the corporate veil" is commonly used as intending to fix liability upon individual directors or officers separate and apart from liability upon the corporation. This concept is rarely applied and typically occurs when there is fraudulent use of a corporate entity or the corporation can properly be characterized as a "sham" to give those in control some advantage or protect them from personal responsibility (Gilford Motor Co. v. Home). Under modern legislation, such as with respect to the oppression provisions in the Canada Business Corporations Act and Ontario Business Corporations Act, remedies are provided whereby enforcement may be directly against directors and officers personally for corporate acts or omissions which are found to be oppressive to shareholders or creditors.

There was at one time some question as to whether directors and officers could be held personally responsible for tortious conduct if they were acting in good faith in pursuit of corporate goals. However, it is now clear that directors and officers will be personally liable for their own tortious conduct regardless of whether they are acting in the best interests of the corporation (ADGE Systems International Limited v. Valcom). But conversely, directors and officers are not at common law vicariously liable for acts of the corporation perpetrated by others (Scotia McLeod Inc. v. Peoples Jewellers).

Tactical Considerations

In conceiving the claims to be litigated, many plaintiffs name directors and officers as additional defendant parties. There are at least two fundamental reasons for doing so. The first is tactical in that this multiplies the discovery opportunities available to the plaintiff. Furthermore, leverage is gained which may provoke settlement due to the perceived personal risk, the time that will be devoted to defending the claim by these individual parties and the general unpleasantness of being involved in a law suit. Where the addition of individual parties is truly not warranted, the courts have recognized the inappropriateness of this tactical step, as was noted in ADGE, where the court said "business cannot function efficiently if corporate officers and directors are inhibited in carrying on a corporate business because of the fear of being inappropriately swept into law suits".

The second basis for including individual officer and director defendants is that there may indeed be an independent cause of action against these parties. If the actions of the individuals are themselves "tortious" or exhibit a separate identity or interest from the corporation, this may indeed be a completely tenable and winning basis for the addition of such parties individually to the action. This is based upon the principle that individuals are still responsible for their own actions and do have a duty of care to others.

Tort will be determined to be independent if the individual is acting in self-interest to protect or benefit themselves, the conduct goes beyond mere function as an employee or office worker or where the individual is not doing their job effectively (for example, failing to supervise that which was within their responsibility).

Consequently, if pleaded correctly, these actions brought against the individual officers and directors are difficult to strike out and will withstand applications for dismissal on a separate summary judgment application.

Criminal Liability

With respect to individual activity, the matter of criminal liability occasionally surfaces. The principle of corporate identity simply does not apply to protect intentional crimes. Corporations act through individuals. If an individual causes a corporation to commit a crime and has mens rea, then the individual is liable. Similarly, if the individuals acts are identified as acts of the corporation, then the corporation is liable. The concept of identification theory is that corporate liability is based upon whether the action by the employee is within the scope of his or her assigned function. As such, the actions of employees who operate at the lower levels of the hierarchy can nonetheless attract corporate liability if they are acting beyond their assigned function or failing to properly act within it, but the good news is that directors and officers will not necessarily be exposed to criminal liability for those individual actions merely by virtue of being higher up in the hierarchical ladder.

This immunity from individual liability is dependent upon the concept of mens rea, whether there was knowledge of, or a reckless or wilful blindness to, the actions complained of. This also engages the concept of foresight of risk and the taking of steps which created circumstances that gave rise to the harm or which fail to prevent action that did so. Therefore, while identification theory expands potential corporate liability, it can limit the liability of senior officers who have no knowledge of the illegal conduct. Simply being a "directing mind" of a company is not enough for a liability to attach, there must be a knowing directing mind within the sphere of responsibility. There is no vicarious responsibility for crimes which require mens rea.

Many regulatory statutes impose a strict liability regime, the offence occurring with the conduct itself despite the presence or absence of active knowledge of the particular offence. Corporate responsibility for such offences will depend upon agency principles of vicarious liability. Generally, a due diligence defence will be available for such offences.

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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