Directors are often targets for lawsuits that, although aimed primarily at the company, also name them as co-defendants, sometimes to promote the resolution of a dispute. In a decision handed down June 23, 2014,1 the Quebec Superior Court reiterated the principle that directors of a body corporate should never be sued solely on the grounds they acted in that capacity when there is no manifest personal fault alleged against them. The main interest of the decision lies in the fact the Superior Court clearly stated that notwithstanding that the court must exercise caution in dismissing proceedings at the preliminary stage, such proceedings against directors are abusive and must be dismissed. On November 19, 2014, the Court of Appeal refused to grant leave to appeal the decision2.
In this case the plaintiff, Édifice 1010 Ste-Catherine inc. (Édifice 1010), had sold a building in January 2006 to a charitable corporation, the Fondation Mario-Racine (the Fondation). The deed of sale contained a clause in which the Fondation represented and warranted that its GST and QST registration numbers were valid and still in effect. However, it turned out that the numbers provided by the Fondation did not entitle the plaintiff to a tax exemption on the sale of the building.
Édifice 1010 was informed in April 2008 by a tax official that the GST and QST numbers in the deed of sale were incorrect and the tax authorities would be claiming a considerable sum in taxes. Thus, in September 2008 Édifice 1010 received notices of assessment from the tax authorities. After Édifice 1010 put the Fondation and its board of directors on notice of default, it contested the notices and succeeded in having them cancelled, primarily because the sale of the building had been rescinded.
In December 2012, after cancellation of the notices, Édifice 1010 instituted an action for damages against the Fondation, the officiating notary and the Fondation's directors (the Directors) claiming the professional fees and related expenses it incurred in contesting the notices of assessment.
After reiterating the parameters governing motions to dismiss filed under articles 54.1 and following of the Code of Civil Procedure, the Superior Court first held that the action instituted by Édifice 1010 was time barred. It was clear from the record that the entire cause of action had arisen in the fall of 2008 at the latest and Édifice 1010 could readily have instituted its action at the time. On the issue of abuse, the court noted that at the time of the hearing, it had not been demonstrated to the court that additional evidence countering the time limitation argument was likely to have been presented had a hearing on the merits taken place. Because the action was time barred on the face of the record, the court viewed that as an indication of recklessness justifying the finding of abuse.
With respect to the Directors, the court noted they were sued solely because they were directors of the Fondation. In fact, no allegation highlighting any fact likely to constitute sufficient fault to hold them also liable for the Fondation's alleged fault was made against them. The court reiterated what is well established by the Court of Appeal, namely that instituting judicial proceedings is a serious and solemn matter, which engages the integrity of the initiator of those proceedings.
The court went on to state that for the Directors to be personally liable, the action must allege they committed a fault resulting in their extracontractual liability, because directors are otherwise mandataries protected by immunity when they act within their mandate. In this case, even if the action had been amended to add a general allegation of fraud, it did not allege any fact likely to constitute a manifest fault of the Directors.
Furthermore, it was clear from the examination on discovery of the Édifice 1010 representative that the Directors were joined in the action solely because of their status as Fondation board members and for no other reason.
The court therefore held that [translation:] "The directors of a company or a foundation are entitled to not be sued personally merely because they acted in that capacity in the performance of their duties. Lawsuits brought solely for this reason, in the hope of eventually, maybe, with a bit of luck, unearthing some fault on their part and hence finding a cause of action against them, is a clear example of recklessness."3
In the circumstances, the court unhesitatingly found the action abusive and dismissed it. Édifice 1010 was unsuccessful in its application for leave to appeal that decision.
Norton Rose Fulbright Canada represented the Fondation Mario-Racine directors in this case.
1. Édifice 1010 Ste-Catherine Est Inc. v. Fondation Mario-Racine et al. July 8, 2014, 500-17-075305-121.
2. Édifice 1010 Ste-Catherine Est Inc. v. Fondation Mario-Racine, 2014 QCCA 2135.
3. Édifice 1010 v Fondation Mario-Racine, Para 49.
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