Legal Blog

Director’s Liability

There has been an increasing movement to join directors and officers in actions against corporations, just in case the corporations are insolvent come judgment day. The chances for success have waxed and waned over the past 15 years as the courts have attempted to balance the competing interests involved. The latest case seems to have clarified the law and, at the same time, made it much easier, at least at the pleadings stage, to join officers and directors in an action. 

Hard Cases

In ADGA Systems International Ltd. v. Valcom Ltd., an unreported 1999 decision of the Ontario Court of Appeal, the facts were blatantly against the alleged perpetrators. ADGA and Valcom were competitors, each bidding on a major contract with the federal government for work that had previously been serviced by ADGA. The request for proposal asked for the proposers to name 25 senior technicians in their employ and give their qualifications. ADGA alleged that Valcom had none and, accordingly, Valcom’s directors and officers contacted ADGA’s employees and obtained their permission to be inserted as the technicians in Valcom’s proposal. Valcom was awarded the contract and all but one of ADGA’s 45 technicians left ADGA’s employ and moved to the employ of Valcom. ADGA sued Valcom and its directors and officers for inducing breach of fiduciary duty.

The motions judge and the Divisional Court each allowed the directors’ motion to strike out the claim as against them personally on the grounds that the directors were not attempting to further their own interests but, rather, at all times were acting in the best interests of Valcom.

Rule and Exception

The Court of Appeal noted that the general rule states that individuals are personally liable for torts committed by them. The only exception to the general rule relates to an action for inducing breach of contract. In this type of case, the plaintiff has to prove that the actions of the individuals constitute an independent tort or exhibit an identity of interest distinct from the corporation for which the individuals act so that their actions are no longer taken on behalf of the corporation but are their own.

No More Exceptions

The Court of Appeal noted that there were no other exceptions to the rule. Accordingly, since the individuals in this case were alleged to have committed a tort in their own right, they could be held personally liable. The Court did open the door to a dichotomy between situations in which the complaining parties chose to contract with the corporation for whom the individuals worked and, therefore, accepted limited liability and, as in the ADGA case, situations in which the complainants had no contractual relationship with the corporation by whom the individuals were employed. In the former case, there might be a possibility of another exception to the general rule.

Result

If you are commencing an action and want to join individuals, along with the corporation, ensure that you plead facts to support the commission of a separate tort on behalf of the individuals. If you are advising officers and directors, warn them that their actions will be carefully scrutinised and that their employment by a corporation may not protect them from their tortious acts.