Canada: Beyond The Duties Of Care And Loyalty … The Civil Liability Of Directors

In our first article on governance, entitled "Duties and Obligations of Directors: a Brief Overview"1, we summarized the main concepts underlying the duties and obligations typically associated with directors, i.e.:

  • the duty of prudence and diligence (the "duty of care") and the duty of loyalty – duties that are often associated to fiduciary duties at common law2;
  • statutory liabilities (i.e. liabilities originating in legislation) specific to directors which, in several cases, were adopted to facilitate proving breaches of the duties of care and loyalty.

Must the conclusion then be that the personal responsibilities of directors are limited to these two categories? The answer is no. A director, like any natural or legal person, is also subject to the rules governing civil liability3. Directors can commit a fault causing harm for which they will be liable, despite having acted in their capacity as a director when the fault was committed.

Defining civil liability

A director's civil liability flows from the Civil Code of Québec ("CCQ"), which "governs persons [and] relations between persons"4, and specifically from article 1457 thereof, which provides that every person must "abide by the rules of conduct incumbent on him, according to the circumstances, usage or law, so as not to cause injury to another"5. If directors do not act in accordance with these rules, they may be liable for any harm thereby caused to another person.

By way of example, a director may be personally liable for:

  • making a false statement;
  • falsifying a document;
  • not negotiating in good faith.

Circumscribing the scope of directors' immunity

Many will then ask: why should a director be held personally liable for actions taken in the performance of his/her duties, when he/she was acting on behalf of the corporation? The assumption behind this question is that since a director is the agent of the corporation, he/she should have immunity. That is indeed true, but only to a limited extent: directors have immunity, but it is relative and not absolute.

In order to better understand the subtleties involved, here are the parameters circumscribing the civil liability of directors:

  • the corporation, as a legal person, has legal personality6, which allows it for example to contract with other persons, hire employees, own and dispose of property or take legal action to protect its reputation7;
  • the legal personality of the corporation is separate from that of its directors8;
  • despite having legal personality, the corporation remains a legal fiction that can act only through natural persons, i.e. its officers and directors9;
  • a director is considered to be the agent ("mandatary") of the corporation10;
  • directors cannot be held personally liable for actions they take in their capacity as directors, provided they act within the limits of their mandate11.

Consequently, a court deciding on the liability of a director will have to determine whether he/she acted within the limits of his/her mandate, or exceeded them. It is thus important for directors to fully understand the scope of their mandate vis-à-vis third persons. When a director is called upon to do something that is potentially controversial, he/she should have a resolution adopted by the board confirming the scope of his/her mandate.

Determining fault

A court will also look at whether the director acted in accordance with the corporation's enabling legislation (provincial or federal) and with the applicable provisions of the CCQ. The court could also take into account any other rules, directives or policies that specifically apply to the corporation involved, and how courts have interpreted similar situations in the past.

In order to determine if an extra-contractual fault was committed by a director in a specific situation, the courts apply the test of a reasonable person placed in the same circumstances:

[168] ... On the other hand, to determine if an extra-contractual fault was committed, the general civil law regime uses the 'abstract and objective criterion' model. Therefore, the reference to be used is the "behaviour of a reasonable, prudent and diligent person, and the behavioural norm to be applied is that of conduct accepted or tolerated by society". This does not entail completely ignoring "any concrete dimension of the personality of the individual who caused the harm when assessing his or her conduct". One must situate the person in the office he or she occupied and take into account the specific circumstances of the situation.12 [TRANSLATION]

As the obligations incumbent on directors are not obligations of result, in order to avoid liability, directors do not have to prove that they made the right decision, but one that was reasonable when made in light of the information they were or should have been aware of at the time. This means that directors should take the necessary steps to be properly informed. Wilful blindness will not be tolerated. This presupposes that the director acted in good faith.13 Failure to do so is per se a civil fault.14

In assessing liability, the court must also determine, in addition to whether a fault was committed, whether any harm resulted from it, and if so, how serious it was.

In civil liability matters, there is no evidentiary presumption in favour of or against a director. That is not the case, however, in certain instances of statutory liability, which will be the subject of our next article.

Footnotes

1 http://langlois.ca/duties-obligations-directors-brief-overview

2 In our view, while the term "fiduciary duties" has the merit of being concise, it erroneously conveys the legal nature of these duties under the Quebec Civil Code. In this regard, see Gravino v. Enerchem Transport inc., 2008 QCCA 1820, para. 39.

3 Although the civil liability regime also applies to the breach of contractual obligations (art. 1458 CCQ), that is very rarely the case with directors. For that reason, this article focuses on their extra-contractual liability.

4 Preliminary provision, 1st paragraph, CCQ

5 Article 1457, 1st paragraph, CCQ

6 Art. 298 CCQ: "Legal persons are endowed with juridical personality."

7 Art. 301 CCQ: "Legal persons have full enjoyment of civil rights."; art. 302 CCQ: "Every legal person has a patrimony which may, to the extent provided by law, be divided or appropriated to a purpose. It also has the extra-patrimonial rights and obligations flowing from its nature."; art. 303 CCQ: "Legal persons have the capacity to exercise all their rights, and the provisions of this Code concerning the exercise of civil rights by natural persons are applicable to them, adapted as required."

8 Art. 309 CCQ: "Legal persons are distinct from their members. Their acts bind none but themselves, except as provided by law."

9 Art. 311 CCQ: "Legal persons act through their organs, such as the board of directors and the general meeting of the members."; art. 312 CCQ: "A legal person is represented by its senior officers, who bind it to the extent of the powers vested in them by law, the constituting act or the by-laws."

10 Art. 321 CCQ: "A director is considered to be the mandatary of the legal person. He shall, in the performance of his duties, conform to the obligations imposed on him by law, the constituting act or the by-laws and he shall act within the limits of the powers conferred on him." It is interesting to note that the Civil Code does not provide that an officer is the mandatary of a legal person, despite officers generally acting as such. The second paragraph of section 116 of Quebec's Business Corporations Act expressly provides that officers are mandataries.

11 Art. 2157 CCQ: "A mandatary who binds himself, within the limits of his mandate, in the name and on behalf of the mandator, is not personally liable to the third person with whom he contracts."; art. 2158 CCQ: "A mandatary who exceeds his powers is personally liable to the third person with whom he contracts, unless the third person was sufficiently aware of the mandate, or unless the mandator has ratified the acts performed by the mandatary."

12 Pincourt (Ville de) v. Construction Cogerex ltée, 2013 QCCA 1773, para. 168

13 Art. 2805 CCQ

14 Articles 6, 7 and 1375 CCQ

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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