ADGA Systems International Ltd. v. Valcom Ltd. et al.*
[Indexed as: ADGA Systems International Ltd. v. Valcom Ltd.]
43 O.R. (3d) 101
 O.J. No. 27
Docket No. C28907
Court of Appeal for Ontario
Carthy, Laskin and Goudge JJ.A.
January 12, 1999
*Application for leave to appeal to the Supreme Court of Canada was dismissed with costs April 6, 2000 (McLachlin C.J., Iacobucci and Major JJ.). S.C.C. File No. 27184. S.C.C. Bulletin, 2000, p. 608.
Corporations — Directors — Personal liability — Plaintiff bringing action against director and senior employees of competitor in their personal capacity for inducing breach of fiduciary duty — No principled basis existing for protecting director and employees from liability on basis that their conduct was in pursuance of interests of corporation — Motion by director and employees for summary judgment dismissing action against them dismissed.
Employment — Employees — Liability of employees — Plaintiff bringing action against director and senior employees of competitor in their personal capacity for inducing breach of fiduciary duty — No principled basis existing for protecting director and employees from liability on basis that their conduct was in pursuance of interests of corporation — Motion by director and employees for summary judgment dismissing action against them dismissed.
The plaintiff brought an action against a competitor, V Ltd., the sole director of V Ltd. and two senior employees of V Ltd. alleging that the defendants had raided its employees and caused it economic damage and seeking damages for inducing breach of contract and inducing breach of fiduciary duty. The director and employees, who were sued in their personal capacity, moved for summary judgment dismissing the claim against them. The motion was dismissed. The Divisional Court allowed the appeal from that order, holding that, since the employees of V Ltd. were not furthering their own interests and were pursuing their duties of employment to further the interests of their employer, no cause of action was revealed which justified a trial. The plaintiff appealed.
Held, the appeal should be allowed.
There was no principled basis for protecting the director and employees of V Ltd. from liability for their alleged conduct on the basis that such conduct was in pursuance of the interests of V Ltd. It may be that for policy reasons the law as to the allocation of responsibility for tortious conduct should be adjusted to provide some protection to employees, officers or directors, or all of them, in limited circumstances where, for instance, they are acting in the best interests of the corporation with parties who have voluntarily chosen to accept the ambit of risk of a limited liability company. However, the creation of such a policy should not evolve from the facts of this case where the alleged conduct was intentional and the only relationship between the corporate parties was as competitors.
Craik v. Aetna Life Insurance Co. of Canada,  O.J. No. 3286 (Gen. Div.), affd  O.J. No. 2377 (C.A.); Golden v. Anderson, 64 Cal.Rptr. 404 (1967); Kepic v. Tecumseh Road Builders (1987), 23 O.A.C. 72, 18 C.C.E.L. 218; London Drugs Ltd. v. Kuehne & Nagel International Ltd.,  3 S.C.R. 299, 73 B.C.L.R. (2d) 1, 97 D.L.R. (4th) 261, 143 N.R. 1,  1 W.W.R. 1, 43 C.C.E.L. 1, 13 C.C.L.T. (2d) 1; Montreal Trust Co. of Canada v. ScotiaMcLeod Inc. (1995), 26 O.R. (3d) 481, 129 D.L.R. (4th) 711 (C.A.) (sub nom. ScotiaMcLeod Inc. v. Peoples Jewellers Ltd.); Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 37 O.R. (3d) 97, 155 D.L.R. (4th) 627, 41 C.C.L.T. (2d) 282, 17 C.P.C. (4th) 170 (C.A.); Said v. Butt,  3 K.B. 497,  All E.R. Rep. 232, 90 L.J.K.B. 239, 124 L.T. 413, 36 T.L.R. 762; Truckers Garage Inc. v. Krell (1993), 68 O.A.C. 106, 3 C.C.E.L. (2d) 157 (Div. Ct.), consd
Other cases referred to
Alper Development Inc. v. Harrowston Corp. (1998), 38 O.R. (3d) 785, 36 C.C.E.L. (2d) 173 (C.A.); Berger v. Willowdale A.M.C. (1983), 41 O.R. (2d) 89, 145 D.L.R. (3d) 247, 23 B.L.R. 19 (C.A.); Lewis v. Boutilier (1919), 52 D.L.R. 383 (S.C.C.); Salomon v. Salomon & Co. Ltd., [1895-9] All E.R. 33 (H.L.); Sullivan v. Desrosiers (1986), 76 N.B.R. (2d) 271, 192 A.P.R. 271, 40 C.C.L.T. 66 (C.A.)
APPEAL from a judgment of the Divisional Court ((1997), 105 O.A.C. 209, 33 C.C.E.L. (2d) 135) allowing an appeal from a dismissal of a motion for summary judgment dismissing an action against the moving parties.
David B. Debenham, for appellant.
M. James O’Grady, Q.C., and Katherine J. Young, for respondents.
The judgment of the court was delivered by
CARTHY J.A.: — This appeal presents for consideration once again the troublesome issue of the liability of officers and directors of a corporation for acts done in pursuance of a corporate purpose.
The plaintiff, ADGA Systems International Ltd., has claimed that a competitor, the defendant Valcom Ltd., raided its employees and caused the plaintiff economic damage. The plaintiff also claims against three of its own employees for breach of fiduciary duty in acceding to the importunes of Valcom Ltd. The issue in controversy on this particular appeal is the claim by the plaintiff against the director and two employees of Valcom Ltd. for their personal involvement in this recruitment program. Those three defendants brought a motion for summary judgment seeking to dismiss the claim against them. The motion was dismissed by Mercier J. The Divisional Court then heard an appeal from that order, allowed the appeal, and dismissed the claim against those three defendants. The plaintiff now appeals to this court and seeks to justify proceeding to trial against MacPherson, the Director of Valcom Ltd. and Ewing and McKenzie, senior employees of Valcom Ltd. The question is whether the respondents can be sued for thei r actions as individuals, assuming those actions were genuinely directed to the best interests of their corporate employer. In my view a cause of action does exist against the respondents and a trial is required to determine the merits of that action.
For purposes of this appeal, a simple sketch of the background facts is sufficient. The plaintiff ADGA and the defendant Valcom were competitors, and for some years the plaintiff had a substantial contract with Correctional Services Canada for technical support and maintenance of security systems in the federal prisons. In 1991 the contract was coming up for renewal and the Department of Supply and Services called for tenders. One of the conditions of the tender was that the tendering party provide the names of 25 senior technicians together with their qualifications, thus assuring that the tendering company would be competent to perform the work required under the contract. Through its long association with this contract, the plaintiff had 45 such employees. Valcom is alleged to have had none. The pleadings and the evidence indicate that Valcom, through its sole director MacPherson and the two senior employees Ewing and McKenzie, set out to interview the senior representatives of the plaintiff’s technica l staff to convince them of the following: to permit their names to be used on the tendering document; to come to work for Valcom if the tender was successful; and to use their efforts to convince the other employees on the technical staff of the plaintiff to do likewise. In the result, all but one of the 45 members of the plaintiff’s technical staff apparently “signed on” with Valcom. Both companies presented the same staff in their tender offerings, and Valcom was the successful bidder.
In the statement of claim as amended, and in addition to damages sought against its own employees and Valcom, the plaintiff seeks damages against the respondents to this appeal for inducing breach of contract, for interference with economic interests and relations and for inducing breaches of fiduciary duty. Judging from the argument of the appellant, it appears that the focus of the claim against the respondents is now limited to inducing breach of fiduciary duty.
On the original motion, Mercier J. commented that the circumstances of this case are very different from those normally found in cases where the plaintiff seeks to pierce the corporate veil in order to claim liability against employees or directors of a company, and concluded that there was more than one triable issue that could not be determined by way of summary judgment.
A review of the reasons of the Divisional Court [(1997), 105 O.A.C. 209, 33 C.C.E.L. (2d) 135] indicates that in allowing the appeal, emphasis was placed on the decision of this court in Montreal Trust Co. of Canada v. ScotiaMcLeod Inc. (1995), 26 O.R. (3d) 481, 129 D.L.R. (4th) 711. [See Note 1 at end of document.] Since the employees of Valcom were not furthering their own interests in any respect and were pursuing their duties of employment to further the interests of their employer, the Divisional Court relied on ScotiaMcLeod as the basis for concluding that no cause of action was revealed which justifies a trial.
In its conclusion, the Divisional Court observed (at p. 216) that, “[i]n commercial cases such as this, our courts are carefully examining the trend of simply suing officers, directors and employees in their personal capacities, without really carefully examining the facts or without carefully pleading the allegations which relate to them personally.” Analysis At the outset, my analysis of the pleadings indicates no lack of particularity as is often found in similar instances. The pleadings specifically allege that the competitor’s employees and sole director developed the “recruitment” plan, approached the appellant’s employees individually, and were successful in accomplishing the intended purpose, thereby causing damage to the appellant. The distinction, if any, between inducing a breach of contract and inducing a breach of fiduciary duty is not a present concern on a summary judgment proceeding. If there is to be a trial, that issue can be resolved on the basis of all of the evidence. The issue that I must deal with is whether, on the assumption that the defendant Valcom committed a tort against the appellant, the sole director and employees of Valcom can be accountable for the same tort as a consequence of their personal involvement directed to the perceived best interests of the corporation.
My first observation is that I recognize the policy concern expressed by the Divisional Court, and other General Division judges, over the proliferation of claims against officers and directors of corporations in circumstances which give the appearance of the desire for discovery or leverage in the litigation process. This is a proper concern because business cannot function efficiently if corporate officers and directors are inhibited in carrying on a corporate business because of a fear of being inappropriately swept into lawsuits, or, worse, are driven away from involvement in any respect in corporate business by the potential exposure to ill-founded litigation.
That being said, it is not appropriate to extend the reasoning of ScotiaMcLeod beyond its intended application by reading it as protecting all conduct by officers and employees in pursuit of corporate purposes. The common law should not develop on an ad hoc basis to put out fires. When a policy issue arises, here from modern b usiness realities, the courts must proceed on a principled basis to establish a framework for further development which recognizes the new realities but preserves the fundamental purpose served by that area of law. For this reason I intend to analyze the development of law in this field from its beginnings. That beginning is found in the House of Lords’ decision in Salomon v. Salomon & Co. Ltd., [1895-9] All E.R. 33 (H.L.), which established that a company, once legally incorporated, must be treated like any other independent person, with rights and liabilities appropriate to itself. From time to time, litigants have sought to lift this “corporate veil”, by seeking to make principals of the corporation liable for the obligations of the corporation. However, where, as here, the plaintiff relies upon establishing an independent cause of action against the principals of the company, the corporate veil is not threatened and the Salomon principle remains intact.
The distinction between an independent cause of action and looking through the corporation was confirmed by the subsequent case of Said v. Butt,  3 K.B. 497. This is a King’s Bench decision but has been adopted in Canada and throughout the United States. (See, for instance, Kepic v. Tecumseh Road Builders (1987), 18 C.C.E.L. 218 at p. 222, 23 O.A.C. 72; and Golden v. Anderson, 64 Cal.Rptr. 404 (1967) at p. 408.)
In Said v. Butt, the plaintiff was engaged in a dispute with an opera company which refused to sell him tickets to a performance. The plaintiff purchased a ticket through an agent and when he appeared at the opera the defendant, an employee of the opera company recognized him and ejected him. The plaintiff sued the employee for wrongfully procuring the company to break a contract made by the company to sell the plaintiff a ticket.
The court held that there was no contract because the company would not knowingly have sold a ticket to the plaintiff. Nevertheless, on the assumption that there was a contract, the court considered the implications to the defendant employee. McCardie J. stated at p. 504:
It is well to point out that Sir Alfred Butt possessed the widest powers as the chairman and sole managing director of the Palace Theatre, Ld. He clearly acted within those powers when he directed that the plaintiff should be refused admission on December 23. I am satisfied, also, that he meant to act and did act bona fide for the protection of the interests of his company. If, therefore, the plaintiff, assuming that a contract existed between the company and himself, can sue the defendant for wrongfully procuring a breach of that contract, the gravest and widest consequences must ensue.
After detailing the mischief that would flow from permitting such claims to be made McCardie J. concluded at p. 506:
I hold 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. . . . Nothing that I have said to-day is, I hope, 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 one of such recognized heads of tortious wrong.
For present purposes, I extract the following from McCardie J.’s reasons. First, this is not an application of Salomon. That case is not mentioned anywhere in the reasons. Second, it provides an exception to the general rule that persons are responsible for their own conduct. That exception has since gained acceptance because it assures that persons who deal with a limited company and accept the imposition of limited liability will not have available to them both a claim for breach of contract against a company and a claim for tortious conduct against the director with damages assessed on a different basis. The exception also assures that officers and directors, in the process of carrying on business, are capable of directing that a contract of employment be terminated or that a business contract not be performed on the assumed basis that the company’s best interest is to pay the damages for failure to perform. By carving out the exception for these policy reasons, the court has emphasized and left intact the general liability of any individual for personal conduct.
The third point of interest arises from this excerpt from the reasons at p. 505:
The explanation of the breadth of the language used in the decisions probably lies in the fact that in every one of the sets of circumstances before the Court the person who procured the breach of contract was in fact a stranger, that is a third person, who stood wholly outside the area of the bargain made between the two contracting parties. If he is in the position of a stranger, he will be prima facie liable, even though he may act honestly, or without malice, or in the best interests of himself; or even if he acts as an altruist, seeking only the good of another . . .
The court was there referring to the stranger as the wrongdoer but the same principle might be applied in the converse situation where the stranger is the victim. This suggestion, was picked up later in the dissenting reasons of La Forest J. in London Drugs Ltd. v. Kuehne & Nagel International Ltd., infra, to the effect that a jurisprudential division line might be drawn between those who contract with the company, or voluntarily deal with it, and can be taken to have accepted limited liability, and strangers to the company whose only concern is not to be harmed by the conduct of others. On that theory, those harmed as strangers to the corporate body naturally look for liability to the persons who caused the harm and those who have in some manner accepted limited liability in their dealings with the company would be limited in recourse to the company. As evidenced by the decision in London Drugs v. Kuehne that theory of demarcation of liability has not been adopted in Canada.
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. In Lewis v. Boutilier (1919), 52 D.L.R. 383 at p. 389 (S.C.C.), the president of a company was held personally liable for negligently putting a boy to work in a dangerous area of a sawmill where he was killed. It was held to be no defence to the president that the corporation that owned the sawmill might also be liable.
In Berger v. Willowdale A.M.C. (1983), 41 O.R. (2d) 89 at p. 98, 145 D.L.R. (3d) 247 (C.A.), leave to appeal to the Supreme Court of Canada refused May 17, 1983, this court dealt with a claim by an employee against the president of her employer corporation for damages arising from slipping on an icy sidewalk. Under the Workmen’s Compensation Act, employees could not be sued for such workplace accidents. However, executives were excluded from the definition of employees under the Workmen’s Compensation Act. The court held that, given the existence of a duty of care owed by the president to this employee, and a failure to respond appropriately to that duty, damages against the president were recoverable even though the action against the company was barred by the provisions of the Workman’s Compensation Act. The fact that the duty of care co- existed in the employer and president did not constitute a bar to a claim against the executive officer.
In Sullivan v. Desrosiers (1986), 76 N.B.R. (2d) 271, 40 C.C.L.T. 66 (C.A.), leave to appeal to the Supreme Court of Canada refused June 4, 1987, the plaintiffs were surrounding landowners of a hog farm who claimed that their lands had been polluted by a manure lagoon on the site of the farm. The issue before the Court of Appeal was whether the owner of the company could be held personally liable.
At p. 277 Hoyt J.A. stated:
The question here is whether Mr. Sullivan, who was the manager and principal employee of the company that committed the nuisance, may be responsible along with the company. I see no reason why, because of his involvement in creating and maintaining the nuisance, Mr. Sullivan should not also be responsible.
And at p. 278:
Nor am I attracted to the submission that Mr. Sullivan is protected by reason of the rule in Salomon v. Salomon & Co.,  A.C. 22. The question here, as I have pointed out, is not whether Mr. Sullivan was acting on behalf of or even if he “was” the company, but whether a legal barrier, here a company, can be erected between a person found to be a wrongdoer and an injured party thereby relieving the wrongdoer of his liability. In my opinion, once it is determined that a person breaches a duty owed to neighbouring landowners not to interfere with their reasonable enjoyment of their property, liability may be imposed on him and he may not escape by saying that as well as being a wrongdoer he is also a company manager or employee.
The Supreme Court of Canada again considered the issue of an employee’s liability for acts done in the course of his duties on behalf of the employer in London Drugs Ltd. v. Kuehne & Nagel International Ltd.,  3 S.C.R. 299, 97 D.L.R. (4th) 261. The plaintiff delivered a transformer to a warehouse company for storage. An employee of the warehouse company negligently permitted the transformer to topple over, causing extensive damage. Even though there was a contractual relationship between the company and the customer, the majority held in favour of the claim against the employee.
Iacobucci J. stated at pp. 407-08:
There is no general rule in Canada to the effect that an employee acting in the course of his or her employment and performing the “very essence” of his or her employer’s contractual obligations with a customer does not owe a duty of care, whether one labels it “independent” or otherwise, to the employer’s customer. . . .
. . . The mere fact that the employee is performing the “very essence” of a contract between the plaintiff and his or her employer does not, in itself, necessarily preclude a conclusion that a duty of care was present.
La Forest J. dissented on this issue and was prepared to relieve the employee from personal liability in tort where the tort occurred in the context of a breach of contract between the employer and the customer, and so long as the employee’s tort was in the course of duties. His analysis of the distinction between the voluntary and involuntary creditor is, and will continue to be, of interest as policy questions impact upon the evolving jurisprudence in this area. At p. 349 he stated:
The distinction between voluntary and involuntary creditors is also useful in this area. As commentators have pointed out (Halpern, Trebilcock and Turnbull, “An Economic Analysis of Limited Liability in Corporation Law” (1980), 30 U.T.L.J. 117), different types of claimants against the corporation have differing abilities to benefit from being put on notice with respect to the impact of the limited liability regime. At one end, creditors like bond holders and banks are generally well situated to evaluate the risks of default and to contract accordingly. These “voluntary” creditors can be considered to be capable of protecting themselves from the consequences of a limited liability regime and the practically systematic recourse by banks to personal guarantees by the principals of small companies attests to that fact.
At the other end of the spectrum are classic involuntary tort creditors exemplified by a plaintiff who is injured when run down by an employee driving a motorcar. These involuntary creditors are those who never chose to enter into a course of dealing with the company and correspond to what I have termed as the classic vicarious liability claimant.
These Canadian authorities at the appellate level confirm clearly that employees, officers and directors will be held personally liable for tortious conduct causing physical injury, property damage, or a nuisance even when their actions are pursuant to their duties to the corporation.
An action for economic recovery on facts quite similar to those before this court was considered by the California Court of Appeal, Second District, in Golden v. Anderson, supra. There, a brokerage firm claimed that employees of a competitor brokerage firm had conspired together to interfere in the plaintiff’s relationship with a customer with the intent of depriving it of a commission. The court upheld recovery and distinguished the situation before it, which involved a claim against strangers to the plaintiff corporation, from that where the employees’ conduct relates to a contract made with their employer.
At p. 408, the opinion of Jefferson J. reads:
The court found that, since the evidence showed these three defendants were acting in their representative capacities as managing agents of the defendant corporations, they were immune from liability. The court erred in so concluding.
Plaintiff’s action is for an intentional tort. All persons who are shown to have participated are liable for the full amount of the damages suffered. . . . “When conspiring corporate officials act tortiously and individuals are injured as a proximate result, such tortfeasors are liable to the injured persons even though the corporation may also be liable . . .
The case of Wise v. Southern Pacific Co., 223 Cal.App.2d 50, 35 Cal.Rptr. 652, relied on by defendants and by the court below, involved the situation, not here present, where the corporate defendant was charged with breach of contract and with conspiring with its officials and agents to breach that contract. The court applied the familiar rule that corporate officers are privileged to participate in their representative capacities in the breach of a contract by their corporate principal [this refers to the principle in Said v. Butt]. . . .
Although the jurisprudence on this subject has followed a very straight path since the decisions in Salomon v. Salomon and Said v. Butt, in recent years in this jurisdiction judges hearing motions to dismiss claims have tended to smudge these principles, inspired, in my view, and as expressed by them, by the legitimate concern as to the number of cases in which employees, officers, and directors are joined for questionable purposes. The assumption has filtered into reasons for judgment that the employee is absolved if acting in the interests of the corporation, the employer, even in cases that do not raise the Said v. Butt defence.
An immediate example is found in the reasons of the Divisional Court in this case where at p. 214 of the reasons it is stated:
There was no evidence to show that what these appellants did was to further their own interests in any respect. All evidence points to the fact that their actions were done as part of their duties of employment and to further the interests of Valcom.
The judgment then proceeds to analyze the jurisprudence in support of the above conclusion. Dealing with the appellate authorities referred to by the Divisional Court, the first is Craik v. Aetna Life Insurance Co. of Canada,  O.J. No. 3286 (Gen. Div.), Court File No. 95-CQ-64403, affirmed by the Court of Appeal  O.J. No. 2377. The facts are somewhat similar to those before this court, but the decision of Cumming J. and the oral endorsement of this court appear to pivot on the fact that the pleadings asserted that the corporation acted tortiously but did not assert that the employees acted in any personal capacity. The claim against the employees was struck out.
Reliance was also placed by the Divisional Court on Truckers Garage Inc. v. Krell (1993), 68 O.A.C. 106, 3 C.C.E.L. (2d) 157. That was a case in which a principal of the defendant corporation allegedly induced a breach of contract of employment of the plaintiff. That was a classic Said v. Butt example and, in this court Osborne J.A. said as follows:
Marvin Teperman was Truckers’ directing mind when Krell was both hired and fired. However, that alone is not enough to find him liable for inducing the breach of the Truckers-Krell employment contract. At the very least the evidence must establish, to a degree of probability, that some separate interest from Teperman’s standpoint was involved. See Ontario Store Fixtures Inc. v. Mmmuffins Inc. (1989), 70 O.R. (2d) 42. If that were not the case the directing mind of any corporate employer would he liable for the tort of inducing a breach of contract in the event an employee was wrongfully terminated. This court’s judgment in Kepic v. Tecumseh Road Builders, Division of Countryside Farms Ltd. (1987), 18 C.C.E.L. 218 (C.A.) provides an example of what is required. In that case, the individual defendants acted fraudulently in furtherance of their personal interests. In another case, McFadden v. 481782 Ont. Ltd. (1984), 47 O.R. (2d) 134 (H.C.), the individual defendants wrongfully re moved money from the company for their personal benefit. Thus, personal liability was found in both cases. In this case, there is no evidence and no finding by the trial judge of an intentional wrongful or unlawful act by Marvin Teperman. There is no evidence that Marvin Teperman acted as he did for his personal gain. Kepic v. Tecumseh Road Builders, supra, referred to by Osborne J.A. is helpful in putting the expression “acting bona fide in the interests of the company” in proper context.
In Kepic, Brooke J.A. stated at p. 222:
It is well established that the directors of a corporation will not be liable for inducing that corporation to breach its contract when they are performing bona fide their functions as corporate officers. See Said v. Butt,  3 K.B. 497; Thomson & Co. v. Deakins,  2 All E.R. 361,  1 Ch. 6461 (C.A.). This is not the case where a director acts in a fraudulent manner: Fraudulent efforts by a director of a corporation to increase the revenue of that body cannot be said to be bona fide in its best interest. See generally Einhorn v. Westmount Investments Ltd. (1969), 69 W.W.R. 31, 6 D.L.R. (3d) 71 (Sask. Q.B.), affirmed (1970), 73 W.W.R. D.L.R. (3d) 509 (Sask. C.A.) [sic]; McFadden v. 481782 Ontario Ltd. (1984), 47 O.R. (2d) 134, 5 C.C.E.L. 83, 27 B.L.R. 173 (Ont. H.C.). Thus, an officer is disentitled to the Said v. Butt defence if he is not acting bona fide in the interests of the company. This is not to say that if Said v. Butt has no application the conduct is excused if the interests of the company are being served.
The Divisional Court placed its prime reliance on the judgment in ScotiaMcLeod Inc. and in doing so created a much broader canvass for the reasoning of this court than it was, by its language, intended to fill. That case concerned whether a reasonable cause of action was pleaded against certain individual directors of the defendant company. The plaintiff’s complaint was that, as a result of certain filing statements, it had been misled into making investments in the defendant corporation’s debentures.
The dismissal of the claim against what I will call a group of non-active directors was upheld because the pleading did not allege any negligence against them. The plaintiff sought to hold those directors vicariously liable for the negligence of the corporation, and no attempt was made in the pleading to single out their activities as individuals. This is similar to the situation in Craik v. Aetna, supra. On the other hand, two of the directors who had attended and made representations at a due diligence meeting were alleged to have been directly and personally involved in the marketing of the debentures and to have made representations which were relied upon by the plaintiffs. The action against those active directors was permitted to go to trial.
An excerpt from the reasoning of Finlayson J.A. in ScotiaMcLeod Inc., at pp. 490-91 O.R., pp. 720-21 D.L.R., has been quoted from time to time by General Division judges and, here, by the Divisional Court, as suggesting some limitation on the liability of directors and officers who are acting in the course of their duties:
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 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), 70 O.R. (2d) 42 (H.J.C.), 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.
The operative portion of this paragraph is the final sentence which confirms that, where properly pleaded, officers or employees can be liable for tortious conduct even when acting in the course of duty. That this is clearly the intent of what was being stated is evidenced by the conclusion that the action should proceed against two defendants; against whom negligent conduct had been properly pleaded. The reasoning of ScotiaMcLeod has been recently applied by this court in decisions which confirm my interpretation.
In Normart Management Ltd. v. West Hill Redevelopment Co. (1998), 37 O.R. (3d) 97, 155 D.L.R. (4th) 627 (C.A.), Finlayson J.A. again wrote reasons for this court dealing with an allegation that individual directors had conspired with their corporation to cause injury to a company that had a contractual relationship with the defendant corporation. At p. 102 Finlayson J.A. stated:
It is well established that the directing minds of corporations cannot be held civilly liable for the actions of the corporations they control and direct unless there is some conduct on the part of those directing minds that is either tortious in itself or exhibits a separate identity or interest from that of the corporations such as to make the acts or conduct complained of those of the directing minds: see ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 26 O.R. (3d) 481 at p. 491, 129 D.L.R. (4th) 711 (C.A.). In the statement of claim in appeal, there is no factual underpinning to support an allegation that the personal defendants were at any time acting outside their capacity as directors and officers of the corporations of which they were the directing minds.
Although not stated in the reasons, the individual defendants were ostensibly entitled to rely upon Said v. Butt because their alleged conduct was associated with the breach by the defendant corporation of a contract with the plaintiff corporation. In any event, there is nothing in the reasons to detract from my rationale that, where properly pleaded, a claim may be asserted for the tortious conduct of individuals where the defence in Said v. Butt is not available.
In Alper Development Inc. v. Harrowston Corp. (1998), 38 O.R. (3d) 785, 36 C.C.E.L. (2d) 173 (C.A.), this court dealt with a pleading that the corporate defendant had breached its contract with the plaintiff by failing to obtain appropriate insurance coverage and that the vice-president of the defendant was negligent in discharging his duties to the plaintiff.
Goudge J.A. referred to the often quoted excerpt from ScotiaMcLeod and, significantly, italicized the words three lines from the end of that quote “unless it can be shown that their actions are themselves tortious”. Having done so, Goudge
J.A. concluded that on the basis of the Supreme Court of Canada judgment in London Drugs, the pleading did support an allegation of breach of duty of care against the respondent personally and that this pleading justified the case going forward to trial.
It is my conclusion that there is no principled basis for protecting the director and employees of Valcom from liability for their alleged conduct on the basis that such conduct was in pursuance of the interests of the corporation. It may be that for policy reasons the law as to the allocation of responsibility for tortious conduct should be adjusted to provide some protection to employees, officers or directors, or all of them, in limited circumstances where, for instance, they are acting in the best interests of the corporation with parties who have voluntarily chosen to accept the ambit of risk of a limited liability company. However, the creation of such a policy should not evolve from the facts of this case where the alleged conduct was intentional and the only relationship between the corporate parties was as competitors. Any such evolution should await facts which are apposite to the policy concerns and should probably be articulated as a definitive extension of the defence in Said v. Butt. Such a development would be in the direction indicated by La Forest J. in his dissenting reasons in London Drugs and thus may have to await further consideration by the Supreme Court. In the meantime the courts can only be scrupulous in weeding out claims that are improperly pleaded or where the evidence does not justify an allegation of a personal tort. A principled development of jurisprudence is the tradition and the strength of the common law and must take precedence over incidental attempts to abuse the law as it develops.
For these reasons I would allow the appeal, set aside the order of the Divisional Court, and dismiss the original motion for summary judgment. The costs of the motion, of the application for leave to appeal to the Divisional Court and in the Divisional Court, of the application for leave to this court and in this court, shall be to the appellant on a party- and-party basis as against the three respondents.
Note 1: This decision is sometimes also referred to as
ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. For the purposes of these reasons, I will refer to it as ScotiaMcLeod.