The “Corporate Veil” and Crown Agencies

Dermot Muir, General Counsel

Infrastructure Ontario

November ●, 2012

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Purpose of Presentation

A. What is the current state of the law regarding when Courts will “pierce the corporate veil” to find individual directors liable for the conduct of the corporation?

B. What benefits flow from designating entities as Crown agencies?

Current State of the Law

• Three cases were heard by the Ontario Court of Appeal in the 1990s on the issue of lifting the corporate veil and finding directors liable:

– ScotiaMcLeod Inc. v. Peoples Jewellers Ltd., [1995] O.J. No. 3556 (C.A.)

– Normart Management v. West Hill Redevelopment Co., [1998] O.J. No. 391 (C.A.)

– ADGA Systems International Ltd. v. Valcom Ltd., [1999] O.J. No.27 (C.A.).

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The ADGA Trilogy Describes The Current State of the Law on Piercing the Corporate Veil

Justice Carthy in ADGA Systems, quoting Justice Finlayson from Scotia McLeod stated:

in the absence of allegations of fraud, deceit, dishonesty, or want of authority on the part of the officers, directors, or employees of the organization, “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.”

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Recent Cases since ADGADale v. Toronto Real Estate Board, [2012] O.J. No. 215 (S.C.J.)

• Claim against individual defendants allowed to proceed as claims were properly pleaded

• However, Justice Campbell emphasized that: “in the absence of allegations of fraud, deceit, dishonesty, or want of authority on the part of the officers, directors, or employees of the organization, such individuals 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 render the impugned conduct ‘their own.’ Indeed, courts must be scrupulous in ‘weeding out’ claims not properly advanced personally against officers and directors as, without this increased degree of scrutiny, there would be a risk that officers and directors would be driven away from corporate business by potential exposure to ill-founded litigation (para. 44).”

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Recent Cases Since ADGA

Richards v. Media Experts M.H.S. Inc., [2012] O.J. No. 2934 (S.C.J.)

• plaintiff’s claim against individual defendant struck on basis that plaintiff’s employment contract contained exclusion clause, which the individual defendant was entitled to rely upon:

“where liability is limited by contract and one of the contracting parties is a corporation, there is no valid reason for denying the benefit of the clause to employees who perform the contractual obligations (para.24).”

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Recent Case Law from the UK

• If the Court pierces the corporate veil, can another party be found to be the real party to the contract?

See: VTB Capital Inc. v. Nutritek International Corp. [2012] EWCA Civ 808

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Crown Agents and Crown Immunity

• Designating entities as Crown agents confers the benefit of Crown immunity upon these entities

• Crown immunity at common law whittled away by courts

• However, governments can counter this by conferring Crown immunity through legislation

E.g. Proceedings Against the Crown Act, R.S.O. 1990, ch.P.27 (“PACA”)

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Conferring Crown Agency Status Through Legislation

• Courts reluctant to recognize Crown agency status as this concept offends principle of equality before the law (Peter Hogg and Patrick Monahan in Liability of the Crown, 4th ed. (2011), p.468)

• Crown agent status conferred through statute has been held to be determinative (R. v. Eldorado Nuclear, [1983] 2 S.C.R. 551 (S.C.C.)).

• HOWEVER, Crown agent status can be lost if the entity: – acts outside scope of its statutory purpose (CBC v. the Queen,

[1983] 1 S.C.R. 339 (S.C.C.); Eldorado Nuclear, supra, British Columbia Power Corporation Ltd. v. Attorney-General, (1962), 34 D.L.R. (2d) 25 (B.C.C.A.))

– is not acting as Crown agent in the course of performing the impugned conduct (R. v. Campbell, [1999] 1 S.C.R. 551)

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Regulating Liability of Crown Agencies in Tort Through Legislation

• Crown agent only liable for direct tortious conduct – e.g. where the tortious conduct ordered by BOD or officer of corporation.

• Under common law, corporate Crown agent cannot be vicariously liable for individual employees as it is in same position as individual Crown servant in relation to the Crown; both individual and corporate Crown servants are Crown employees, rather than an employee of one by the other (Hogg and Monahan, p.476).

• But Crown can change this by providing in the enabling statute to allow corporate Crown agent to employ individuals on its own behalf and declare that such employees are not employees, officers or servants of HMQ (Hogg and Monahan, pp.476-477).

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Regulating Liability of Crown Agencies in Tort Through Legislation

• Under common law, when corporate Crown agent can be sued, so can the Crown (Hogg and Monahan, p.477), – corporate Crown agent deemed to be in same position as

individual Crown servant.

• Common law position can be varied by statute: – E.g. “Nothing in this Act . . . subjects the Crown to a

proceeding under this Act in respect of a cause of action that is enforceable against a corporation or other agency of the Crown . . . (section 2(2)(b) of PACA).”

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Dumoulin v. Her Majesty the Queen in Right of Ontario, Ontario Realty Corporation et al., (2004) 71 O.R. (3d) 556 (S.C.J.).

• First case to consider section 2(2)(b) of PACA at length

• Facts: the plaintiff claimed damages as a result of being exposed to noxious substances in a court building maintained by the Crown agency and the Crown (para. 2). The Crown moved to strike the claim against itself on the basis of section 2(2)(b) of PACA.

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Dumoulin v. Her Majesty the Queen in Right of Ontario, Ontario Realty Corporation et al., (2004) 71 O.R. (3d) 556 (S.C.J.).

Justice Cullity held:• “scope of section 2(2)(b) is not clear (para. 19).”• Section 2(2)(b) means immunity from liability, rather

than procedural immunity • Provision refers to immunity for the Crown for a “cause

of action that is enforceable against a corporation”• Therefore, liability of the corporation must be

determined before liability against the Crown can be addressed

• Declined on this basis to strike the claim against the Crown (paras. 28-29).

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Toronto (City) v. Longbranch Child Care, (2011) 2011 CarswellOnt 1058 (S.C.J.)

• Toronto sues daycare for failure to comply with order to disburse funds from Toronto in accordance with pay equity scheme funded by Ontario

• Defendant added Ontario as defendant by counterclaim, asserting that Toronto is agent of the Crown and Crown has obligation to contribute funds to daycare’s pay equity plan

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Toronto (City) v. Longbranch Child Care, (2011) 2011 CarswellOnt 1058 (S.C.J.)

• Section 2(2)(b) of PACA considered again (but without Dumoulin, supra, as part of the record).

• Justice Perell states that commencing claim against Crown agency sufficient to trigger the Crown’s immunity in respect of the same claim:“. . . under s.2(2) of [PACA], the Crown is not subject to a proceeding ‘in respect of a cause of action that is enforceable against a .. .agency of the Crown.’ In other words, the effect of [PACA] is to remove the Crown’s immunity to suit that exists at common law, but the Act does not remove Crown immunity if there is an action enforceable against a Crown agent . . . Thus, in the case at bar, if the Crown had notice of anything, it was that Toronto would be sued, and if that were the case, then the Crown would not expect itself to be sued (paras. 44-45).”

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Regulating Liability of Crown Agencies in Contract Through Legislation

• Under common law, Crown agents not personally liable when entering into a contract as a representative of the Crown.

• But the enabling statute can provide that Crown agents can be personally liable if they enter into a contract on their own behalf in addition to on behalf of the principal (Hogg and Monahan, p.478)– e.g. Yeats v. Canada Mortgage and Housing

Corporation, [1950] S.C.R. 513 (S.C.C.), where CMHC’s enabling statute allowed it to enter into contracts in the Crown’s name or in its own name AND stated that CMHC was a Crown agent “for all purposes.”

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