Canada: Alberta Court Of King's Bench Reaffirms Corporate Veil Test In The Construction Context

In the 2022 case, Parks v McAvoy, 2022 ABQB 294, the Alberta Court of Queen's Bench (as it then was) evaluated whether a general contracting company's director could be personally liable for damages when that director had performed work on the project in question. The court summarily dismissed the claim against the director in his personal capacity, and in doing so reaffirmed that directors will not, in most cases, be held personally liable for the tortious actions of their corporations.

Background facts

In an unusual turn of events, the contract between the plaintiff homeowner, Larry Parks, and one or both of the defendants, Steve McAvoy and Woodparke Homes Ltd., was an oral one despite having a monetary value of approximately $4,100,000. The contract was for the construction of a residential property. Construction began in 2011 and concluded in 2014. In 2018, defects in the house became apparent, mostly relating to water ingress, which were significant enough that the plaintiff and his family moved out of the house in February of 2019. The house remained vacant afterward and the plaintiff alleged it would have to be demolished due to the severity of the defects. Additionally, the plaintiff alleged that there had been financial wrongdoing by the defendants over the course of construction. Accordingly, the plaintiff sued McAvoy and Woodparke for the return of the original contract price, plus the cost of demolition.

The impetus for this judgment was an application for summary judgment by the plaintiff against both McAvoy and Woodparke, and a counter-application by McAvoy for summary dismissal of the plaintiff's claims against him personally. The claims McAvoy sought to have dismissed were the ones alleging that he had been a party to the contract in his personal capacity, had been negligent, had made fraudulent misrepresentations, and had committed breach of trust.

The court held that it could not grant summary judgment on the claim against Woodparke due to:

• the volume and incompleteness of the evidence before the court;
• contradictory evidence and expert evidence;
• credibility issues;
• insufficient evidence on causation of the defects; and
• the effect summary judgment against the defendants would have on the defences of third parties who had not yet presented evidence.

As such, the claims against Woodparke would have to proceed to trial. The court also noted that due to the number of third parties and the fact that some of the issues between the plaintiff and defendants would have to be adjudicated at trial anyway, there was no efficiency in summarily granting judgment to the plaintiff on some of his claims when other claims would remain for trial. In our experience, this is a common outcome in construction disputes given the factual complexity of the issues raised. However, the court was prepared to summarily dismiss part of the claim against McAvoy personally, for reasons that follow.

Director's liability analysis

McAvoy was faced with construction damages claims and claims of fraud, deceit, and breach of trust related to the accounting on the project. In an analysis starting at paragraph 126 of the decision, the court evaluated whether these claims could be summarily dismissed, as requested by McAvoy.

The construction claims against McAvoy arose from the plaintiff's allegation that both McAvoy personally and Woodparke were parties to the oral construction contract. As there was no written contract, the court looked to the evidence to determine whether McAvoy could be directly liable for breach of the contract as a party to the contract. The factors considered by the court were:

1. all invoices were issued by Woodparke and not by McAvoy;
2. payment of those invoices by Parks was to Woodparke, so Parks knew he was dealing with Woodparke as a legal entity; and
3. payment for the invoices was deposited into Woodparke's corporate bank account.

On the other hand, all the evidence presented by the plaintiff favouring direct, personal liability on McAvoy's part were personal statements by McAvoy. For instance, he allegedly stated he would "put his shoulder to the wheel" and "work day and night" on finishing the construction. The court held that statements of this type were exactly what a principal of a construction company would say to secure a contract for the company and were not sufficient to ground personal liability for McAvoy.

After establishing that McAvoy was not a party to the contract and therefore not personally liable for breach of contract, the court evaluated whether McAvoy could be personally liable for negligent construction of the property. McAvoy sought to summarily dismiss the negligence allegations against him personally, relying on the well-established doctrine of separate corporate personality from the 1897 case Salomon v Salomon. One of the exceptions to this doctrine is where a director of a corporation commits a tort or is negligent in a way that is so separate from the interests of the corporation that the negligence or tort cannot be attributed back to the corporation, even if that director was acting in the course of his duties as director of the corporation. The court quoted as follows from Stewart v Enterprise Universal Inc, 2010 ABQB 259 to explain this principle in a clear way:

The court reviewed the evidence in this case, and found that the negligence of Woodparke and the negligence of McAvoy were one and the same. For example, the plaintiff alleged that McAvoy negligently failed to repair or identify deficiencies. Identifying and repairing deficiencies was the responsibility of Woodparke, as the company responsible for the construction of the house. As the negligent acts allegedly committed by McAvoy were exactly the same as the negligent acts committed by Woodparke, there was no separate identity to the acts, and accordingly, no personal liability for McAvoy. A claim against McAvoy for fraudulent misrepresentation for allegedly concealing the deficiencies failed for the same reason, and failed for lack of evidence that McAvoy knew of the deficiencies.

The last claim alleged against McAvoy for construction defects was that he owed a fiduciary duty to the plaintiff to ensure a habitable building was constructed, and that he breached that fiduciary duty. The court held that McAvoy owed no fiduciary duty to the plaintiff, so there had been no breach.

Other claims against McAvoy were made under the Fair Trading Act, RSA 2000, c F-2. These claims were dismissed because they were either out of time, or were based on representations that the court held were made by Woodparke and not McAvoy personally. Lastly, the court dismissed several claims for accounting irregularities by McAvoy, save for two.

Conclusion

The holding in Parks v McAvoy reaffirms that a director will not be responsible for their company's torts or contractual breaches in most circumstances, and that a plaintiff will have to prove the director was acting outside of their duties as a director in order to establish personal liability. It is, in general, very difficult to lift the corporate veil between a director and a corporation. When entering into a construction project, it is important to set out the terms in a written contract in order to clearly set out who the parties to the contract are, as this can be an important factor (but not always a determinative one) in fending off attempts to lift the corporate veil.

This case dealt with a contract that was formed and performed prior to the Prompt Payment and Construction Lien Act ("PPCLA") coming into force in Alberta. On projects subject to the PPCLA, the requirement to identify the parties to the contract in a "proper invoice" will theoretically eliminate confusion about who the parties to a construction contract actually are, thereby eliminating claims such as the one against McAvoy in Parks v McAvoy. Miller Thomson LLP has experienced construction lawyers who can assist owners, contractors, and subcontractors with drafting construction contracts to conform with the PPCLA and with resolving construction disputes. Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson's Construction and Infrastructure group.