Director’s Liability for Corporate Negligence

Plaintiffs often cast the net broadly to capture every party with assets or insurance capable of satisfying a potential judgment.  Directors are often named as defendants in claims related to the negligence of the companies they oversee.

Under Canadian law, there are certain circumstances in which a director will become personally liable, but such liability usually arises from statute, such as liability for six months of employee wages, remittance of payroll deductions to tax authorities, and safety and environmental legislation.

Directors will not usually be subject to personal liability for torts committed by their companies.  The foundational principles of the separate corporate identity inform any discussion of personal liability of directors.  The Alberta Court of Appeal has stressed the importance of those principles:[1]

The point is that separate corporate existence, and the resulting limited liability, is not a loophole, a technicality, or a mischievous stratagem; it is an essential tool of social and economic policy.

Merely occupying a role as officer, director or manager does not create personal liability.  Directors have been found to have no liability in the following circumstances:

• for alleged misrepresentations by the company to investors;
• for alleged negligent operation of an oil well servicing;[1]
• for alleged defamatory comments made by a newspaper chain;[2]
• for allegedly allowing employees to be exposed to asbestos during building renovations;[3] or
• for alleged violence perpetrated against locals by a company operating in a developing country.[4]

Liability has been found where a director has abused his role for personal gain.[7]  Directors have also been found liable when they influenced a tender process by promising jobs to employees of a competitor.[8]  Applications to summarily strike claims against directors have not succeeded where directors allegedly knew that sales agents were promoting a real estate investment contrary to securities legislation,[9] or where directors allegedly concealed contamination migrating to an adjacent property.[10]  All of these cases have an undercurrent of illegality and fraud.

Directors may also be liable when they take on a direct supervisory role.  As an example, in Nielsen Estate v Epton[11], the plaintiff was crushed in the course of lifting a heavy industrial load with a crane.  The director, Epton, had supervised the fabrication, transportation and installation of the structures from a work-site office. The employer’s other director and shareholder had been responsible for office management and sales. The director’s failure to attend to the duties that were assigned to him attracted personal liability:

15      The trial judge found that whatever the standard of care was, it would not be met by a director blindly delegating everything as to safety to others without any standards, supervision or guidance. He concluded that Epton should have taken precautions to reduce or avoid the foreseeable harm.  He found Epton breached the standard of care by failing to provide policies and working conditions that would ensure a safe working environment for the workers.

16      The trial judge found the work-site situation was a direct product of Epton’s decisions, actions and omissions. He said the events “were the outcome and product of a corporate state of what might be called consistent negligence” and this “corporate state of being” was a material cause of the accident: 2006 ABQB 21 at paras. 619-620. [emphasis added]

Notably, the other director, who had not been managing the on-site work, was not found liable.

In another case, the Ontario Court of Appeal held that a director could be held liable for the slip-and-fall accident of an employee in the workplace.[12]  The Court stated:

45     It was said that to reach this conclusion would “open the floodgates of litigation”. This in terrorem argument is without foundation. The liability of an executive officer of a corporation will, of course, be dependent upon the facts of the individual case. The factors in determining liability will include the size of the company, particularly the number of employees and the nature of the business; whether or not the danger or risk was or should have been readily apparent to the executive officer; the length of time the dangerous situation was or should have been apparent to the executive officer; whether that officer had the authority and ability to control the situation and whether he had ready access to the means to rectify the danger.

Directors are often sued by plaintiffs casting their net broadly with the hope of attaching liability to a defendant with insurance.  In evaluating the exposure of the insured and the appropriate indemnity reserve, an insurer may take comfort in knowing that a director will have personal liability for the company’s torts in only rare circumstances.  A director will be liable for the company’s tortious conduct only if he has committed an independent tort, often involving an element of illegality or fraud, or if the director has taken a direct role in the operation of the company and in that capacity has committed an independent tort.