Canada: Supreme Court of Canada Confirms Directors’ Fiduciary Duties Are Owed to the Corporation

Last Updated: November 22 2004

Article By John Evans Jean Fraser Clay Horner Andrew MacDougall Shelley Obal and Robert Yalden

A welcome clarification of the duties owed by Canadian directors, the top court’s decision in Peoples v. Wise also highlights the importance of transparency, diligence, prudence and process in reaching reasonable business decisions.

In a unanimous decision, the Supreme Court of Canada held in Peoples v. Wise that directors of Canadian corporations owe a fiduciary duty to the corporation and, in particular, do not owe fiduciary duties to creditors of the corporation. The Court also confirmed that the standard of care for the discharge of directors’ duty of care is an objective standard and that under the Civil Code of Québec creditors may bring an action against directors for breach of duty of care. In addition, the Supreme Court recognized the existence of a Canadian "business judgment rule." The Court’s decision focussed on the duties of directors of a corporation that was verging on insolvency. However, it will have broad implications on the scope of directors’ duties under corporate law generally and on the manner in which directors should fulfill their duties.


In 1992, Wise Stores Inc. bought Peoples Department Stores Inc. Three brothers of the Wise family were majority shareholders, officers and directors of Wise Stores, and became the only directors of Peoples.

Peoples was not a profitable operation at the time it was purchased and its business continued to deteriorate. The Wise business also ran into financial difficulty. On the recommendation of the vice-president of administration and finance of both Wise Stores and Peoples, the Wise brothers agreed to implement a joint inventory procurement policy, under which the two companies would divide responsibility for purchasing inventory. Peoples would make all purchases from North American suppliers and Wise Stores would, in turn, make all purchases from overseas suppliers. Peoples would then transfer to Wise what it had purchased for Wise, charging Wise accordingly, and vice versa. Within a year of adopting the new policy, both Wise and Peoples declared bankruptcy, leaving Peoples with an uncollectible receivable from Wise Stores.

Peoples' trustee in bankruptcy sued the Wise brothers. The trustee claimed that, in implementing the joint inventory procurement policy, the Wise brothers had favoured the interests of Wise Stores over Peoples in breach of their duties as directors under Section 122(1) of the Canada Business Corporations Act (CBCA) — duties that the trustee alleged were owed directly to Peoples’ creditors. The trial judge found the Wise brothers liable on both grounds, but the Québec Court of Appeal set aside the trial judge's decision.

Duties of Directors

The Supreme Court confirmed that the duties of directors under Section 122(1)(a) and (b) of the CBCA are distinct.

Fiduciary Duty of Directors
Directors’ fiduciary duties are set out in Section 122(1)(a) and require that directors "act honestly and in good faith with a view to the best interests of the corporation." The Court confirmed that directors owe their fiduciary duty solely to the corporation, and not to any particular stakeholder group. The Court also confirmed that directors may take into consideration the interests of the corporation’s various stakeholders, provided that they do not disregard entirely the interests of a particular stakeholder group. However, at all times, directors owe their fiduciary obligations to the corporation, and the corporation interests are not to be confused with the interests of the creditors, the shareholders or those of any other stakeholder.

The Supreme Court affirmed that an honest and good faith attempt to redress a corporation's financial problems does not, if unsuccessful, qualify as a breach of fiduciary duty where there is no evidence of fraud, dishonesty, personal interest or improper purpose.

The directors’ fiduciary duty to the corporation under the CBCA contrasts with the statutory duty of directors in the U.S. to the corporation’s shareholders as a whole. In a departure from lower court decisions in Canada and by courts in other commonwealth jurisdictions and the U.S., the Supreme Court also held that a director’s fiduciary duty does not shift to creditors when a corporation is in the nebulous "vicinity of insolvency."

Standard of Care Is Objective
The statutory standard of care that directors are required to meet in discharging their duties under Section 122(1)(b) of the CBCA is an objective one. The Court appears to put paid to the suggestion that the individual skills and expertise of directors will affect the standard of care expected of them. Directors identified as having audit committee financial expertise, for example, may take comfort that, in discharging their responsibilities as directors, they will not be held to a higher standard than that of a reasonably prudent person in comparable circumstances.

Business Judgment Rule Affirmed
In its decision, the Supreme Court affirmed the existence of a Canadian "business judgment rule," whereby the Court will defer to the business judgment of the directors provided that an appropriate degree of prudence and diligence was brought to bear in reaching a reasonable business decision at the time it was made. The Supreme Court re-iterated that perfection is not demanded.

Ultimately, the Supreme Court agreed that the Wise brothers did not breach their duty of care in adopting the joint inventory procurement policy. The implementation of the new policy was a reasonable business decision made with a view to rectifying a serious and urgent business problem in circumstances in which no solution may have been possible.

Impact of Québec Civil Code on Proceedings against Directors

The case having arisen in a civil law context within the Province of Québec, the Supreme Court pointed out that the right of action was grounded in the Civil Code of Québec (CCQ). Article 1457 of the CCQ, which sets out the basic principle governing extra-contractual liability, states that "every person has a duty to abide by the rules of conduct which lie upon him, according to the circumstances, usage or law, so as not to cause injury to another."

The Court noted that Article 1457 should be read as having a broad and inclusive meaning. As a result, it was clear that directors and officers come within the expression "every person" and that the term "another" could include creditors. What was left was to determine what "rules of conduct" were applicable. In this case, the Court found that the duty of care set forth in section 122(1)(b) of the CBCA constituted the applicable rules of conduct.

Three criteria must be met in order for a party to be held liable under Article 1457 of the CCQ: a breach of the applicable rules of conduct, damages, and a causal link between the breach and the damages. In this case, damages were established but the court found that there was neither a breach of the applicable rules of conduct nor evidence that the conduct in question was the cause of the damages.

Although the creditors were ultimately unsuccessful, the interaction between Article 1457 of the CCQ and Section 122(1)(b) of the CBCA provides a potentially powerful additional remedy to creditors of a corporation and potentially other interested parties in Québec to pursue claims for breach of duty of care directly against directors. Creditors outside the Province of Québec in the future may seek to assert a similar right of action for breach of the duty of care.

Reliance on Professional Advice

Directors have a defence under Section 123(5) of the CBCA to the extent that they rely in good faith on a report of a person whose profession lends credibility to a statement made by the professional person. In their defence, the Wise brothers stated that, in implementing the joint procurement policy, they had relied in good faith on the opinion of the vice-president of administration and finance, an officer with a commerce degree and 15 years of experience in administration and finance. However, he was not an accountant or subject to the regulatory overview of any professional organization and did not carry independent insurance coverage for professional negligence. The Supreme Court held that he was not a "professional" as contemplated under Section 123 of the CBCA and reliance on his advice did not give rise to a defence to a breach of duty claim.

Oppression Remedy Highlighted

The Court did not consider the oppression or derivative remedies under the CBCA as the bankruptcy trustee did not specifically seek those remedies. However, the Court noted that the CBCA grants creditors a very extensive oppression remedy under Section 241 of the CBCA with the broadest of creditor remedies in any common law jurisdiction. The Court also noted that a creditor may be a proper person to bring a derivative action in the name of the corporation under Sections 239 and 240 of the CBCA as creditors’ interests increase in relevancy as a corporation’s finances deteriorate.

Decision-making Guidance

The decision in Peoples v. Wise is a welcome clarification on the part of Canada’s highest court of the duties owed by Canadian directors. It also highlights the importance of transparency, diligence, prudence and process in reaching reasonable business decisions.

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.

To view other articles from the Corporate Governance Digest, Fall 2004 please click the link below.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.