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Corporations - Piercing the Corporate Veil

Liability - Piercing the Corporate Veil

Equity - Breach of Fiduciary Duty

Density Group Limited v. HK Hotels LLC (Ont CA, 2014)

In this case the Court of Appeal commented as follows on when the 'corporate veil' can be pierced to render a principal of the corporation personally liable:
[163] In this court’s decision in ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. 1995 CanLII 1301 (ON CA), (1995), 26 O.R. (3d) 481, leave to appeal refused, [1996] S.C.C.A. No. 40, Finlayson J.A. discussed situations in which directors may be held personally liable for actions ostensibly carried out in the corporate name. I think it is helpful to review the principles set out at pp. 490-91:
The decided cases in which employees and officers of companies have been found personally liable for actions ostensibly carried out under a corporate name are fact- specific. In the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers, they are also rare. Those cases in which the corporate veil has been pierced usually involve transactions where the use of the corporate structure was a sham from the outset or was an afterthought to a deal which had gone sour. There is also a considerable body of case-law wherein injured parties to actions for breach of contract have attempted to extend liability to the principals of the company by pleading that the that the principals were privy to the tort of inducing breach of contract between the company and the plaintiff: see Ontario Store Fixtures Inc. v. Mmmuffins Inc. 1989 CanLII 4229 (ON SC), (1989), 70 O.R. (2d) 42 (H.C.J.), and the cases referred to therein. Additionally there have been attempts by injured parties to attach liability to the principals of failed businesses through insolvency litigation. In every case, however, the facts giving rise to personal liability were specifically pleaded. Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own.
[164] In ADGA Systems International Ltd v. Valcom Ltd. 1999 CanLII 1527 (ON CA), (1999), 43 O.R. (3d) 101, leave to appeal refused, [1999] S.C.C.A. 124, Carthy J.A. had occasion to review the law in relation to when an officer or director may be held personally liable even though purportedly acting bona fide in the best interests of the corporation. At p. 107 he stated:
The consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company, always subject to the Said v. Butt exception.
[165] The so-called “Said v. Butt exception” is a longstanding rule dating back to a 1920 decision by the Court of King’s Bench. As that decision comes into play into this case, it is worth briefly reviewing it.

[166] The facts of the case are as follows. Mr. Said wanted to be present at the opening night of a play but knew that if he ordered a ticket in his own name his request would be refused because had made certain serious and unfounded charges against some members of the theatre’s staff. He therefore obtained a ticket through a friend but when he showed up at the theatre with the ticket, he was spotted by the theatre’s managing director, Sir Alfred Butt, and was denied admission. Mr. Said sued Sir Butt on the basis that he wrongfully and maliciously procured the company to break a contract made by the company in selling him a ticket to the performance.

[167] McCardie J. concluded that there was no contract upon which Mr. Said could have sued the theatre. Nonetheless, the trial judge went on to consider whether if the plaintiff had established that there was a valid contract between the theatre and himself, the claim against Mr. Butt personally could have succeeded.

[168] The trial judge concluded, at p. 506, that:
…if a servant acting bona fide within the scope of his authority procures or causes the breach of a contract between his employer and a third person, he does not thereby become liable to an action of tort at the suit of the person whose contract has thereby been broken.
[169] He also clarified that nothing in his decision should be taken as being “inconsistent with the rule that a director or a servant who actually takes part in or actually authorizes such torts as assault, trespass to property, nuisance, or the like may be liable in damages as a joint participant” in such a tortious wrong: p. 506.
Further, on the issue of breach of fiduciary duty in the corporate context, the court stated:
[171] In her analysis of the fiduciary duty claim against Mr. Kallan, the motion judge referred to a number of leading Supreme Court of Canada decisions on fiduciary duties: Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377, which cites the Court’s earlier decision in Frame v. Smith, 1987 CanLII 74 (SCC), [1987] 2 S.C.R. 99, and Alberta v. Elder Advocates of Alberta Society, 2011 SCC 24 (CanLII), 2011 SCC 24, 2 S.C.R. 261.

[172] In particular, she highlighted the principle from Hodgkinson v. Simms that to establish a fiduciary duty outside the established fiduciary categories “what is required is evidence of a mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party”: pp. 409-10.

[173] She also referred to the requirements set out in Elder Advocates for establishing a fiduciary relationship outside a recognized category. First, there must be evidence that the alleged fiduciary undertook to act in the best interests of the beneficiary. Second, it must be shown that the alleged fiduciary has a discretionary power over a defined person or class of persons. Third, there must be evidence that the alleged fiduciary’s power may affect the legal or substantial practical interests of the beneficiary: Elder Advocates, paras. 30 to 34.

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