When is a director of a corporation personally liable to a third party for misconduct arising out of the performance of their duties? A recent decision of the Ontario Superior Court of Justice (Commercial List) in CHU de Québec-Université Laval v Tree of Knowledge International Corp, 2024 ONSC 3541 confirms that directors cannot simply hide behind the separate legal personality of a corporation for liability arising out of transactions from which they directly benefitted.
Facts
The Plaintiff, CHU de Québec-Université Laval ("CHU"), is the largest hospital network in Quebec and had a particular need for N95 respirator masks during the COVID-19 pandemic. Tree of Knowledge International Corp. ("TOKI") and its director, Michael Caridi ("Caridi"), sought to supply hospital institutions like CHU with masks. Caridi and TOKI had a side arrangement to split the profits earned from the sale of the masks.
Following an introduction brokered by the respective agents of CHU and TOKI, Caridi represented to CHU that TOKI was able to supply massive quantities of NIOSH-certified N95 masks. Once CHU expressed interest in purchasing N95 masks from TOKI, Caridi provided a signed invoice for the provision of three million "NIOSH Certified" N95 masks. A corresponding purchase order from Chu confirmed the institution's understanding that the masks would be NIOSH-certified N95 masks.
Once the first batch of masks arrived in Quebec, CHU discovered that TOKI was shipping KN95, not N95, masks. Responding to complaints from CHU, Caridi equivocated, seeking to persuade CHU and its agent that there was no meaningful difference between the N95 masks ordered and the KN95 masks already delivered and on the way. TOKI never did provide the N95 masks ordered by CHU and did not refund the $11.6 million USD paid by CHU.
CHU originally sought damages against TOKI, Caridi and TOKI's agents. By the time of the decision, CHU had settled with or obtained recovery against some parties. As such, the Court only considered whether Caridi was liable for civil fraud or deceit based on lifting of the corporate veil or, alternatively, through the oppression remedy.
Analysis
Applying the test for deceit laid out in Bruno Appliance and Furniture, Inc v Hryniak, 2014 SCC 7, the Court found that in four instances, Caridi had made false representations to CHU with respect to TOKI's capacity to supply 3 million NIOSH-certified N95 masks. Although Caridi claimed to be ignorant or mistaken about the differences between the N95 and KN95 certifications, the Court found that Caridi's recklessness as to the truth and disregard for the possibility that there was a meaningful difference between the two standards was sufficient to establish the elements of the tort.
Caridi argued that even if TOKI has committed deceit, he was personally acting in his capacity as a director of TOKI and entitled to the shield of TOKI's separate legal personality as a corporation. CHU argued that the Court should disregard or pierce the veil of TOKI to obtain judgment against Caridi personally on the grounds that Caridi dominated TOKI and used it as the vehicle to perpetuate a fraud.
The Court disagreed with CHU's approach, declining to pierce the corporate veil of TOKI. In particular, the Court stressed the requirement to show that TOKI was a sham corporation incorporated or used for the very purpose of engaging in fraud. The Court held that CHU had not shown that Caridi used TOKI, which otherwise conducted a legitimate business, for the purposes of conducting a fraud on CHU.
CHU also advanced an oppression claim, arguing that Caridi unfairly disregarded its reasonable expectations that (1) TOKI would not be used as a vehicle for fraud and (2) that TOKI would not dissipate its assets to defeat a judgment. The Court dismissed the oppression claim. With respect to the first expectation, the Court held that because Caridi did not use TOKI as a vehicle for fraud (as noted above in the context of piercing of the corporate veil), this expectation could not have been reasonable. With respect to the second expectation, the Court held that there was simply no evidence that Caridi had depleted the funds of TOKI to defeat judgment creditors.
Although CHU's veil-piercing and oppression arguments failed, the Court did not leave CHU without a remedy against Caridi. In particular, the Court considered whether there were grounds to identify an independent cause of action against Caridi for the tortious misrepresentations he made as a director of TOKI. In this regard, the Court noted that a director is liable for torts committed in their official capacity in cases where their conduct exhibits a separate identity or interest from the corporation that they control.
In this case, Caridi stood to benefit from the transaction with CHU, in that he would receive half of TOKI's profits from the transaction. Accordingly, the Court found that Caridi was acting in both a personal and a corporate capacity when he misrepresented the type of mask that TOKI would supply. Further, Caridi's personal benefit from CHU's reliance on that misrepresentation was sufficient to establish Caridi's personal liability for deceit.
Takeaway
The separate legal personality of a corporation is a venerable concept in Canadian law that will not be lightly set aside. That said, in claims made against closely held corporations for commercial transactions gone wrong, the risk that a judgment will be unrecoverable against the corporation means that plaintiffs should carefully consider whether there are valid claims for personal liability against the corporation's directing minds.
The Court's decision in this case underlines another strategy for plaintiffs seeking to recover against a directing mind of a corporation that does not require piercing the corporate veil: demonstrating that the directing mind had a separate identity or interest from the corporation sufficient to give rise to personal liability for torts committed while acting on behalf of the corporation.
The strategy provides further opportunities for recovery against a director's personal assets but demands that plaintiffs do additional work at the investigation and discovery stage to identify any side-deals or arrangements under which a director stood to benefit directly from a subject transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.