L E G A L  I S S U E S  I N  T H E  W O R K P L A C E
The Employment Bulletin
Editor-in-Chief:  Brian A. Grosman, Q.C.,
Senior Partner of the law firm Grosman, Grosman & Gale LLP

HIDING BEHIND THE CORPORATE VEIL:
THE THIN COMPANY LINE

by William R. Gale

From time to time in employment-related litigation, plaintiffs will not only sue corporate employers, but will also add, as defendants, officers or directors of the corporate defendant. The claims made against these personal defendants are often tactically based to enable the plaintiff an opportunity to examine, for discovery, more than one person or to annoy a senior executive enough to motivate a settlement.

If the claim against an officer or director of a corporate defendant is principally tactical, it is vulnerable to a defence motion to strike out the claim as against the personal defendant on the basis that it discloses no reasonable cause of action. These motions are frequently successful, although the test is a stiff one, i.e., assuming the facts as alleged are true, do the allegations made disclose a triable issue. There has been some confusion in the law related to the personal liability of officers and directors when they act on behalf of their corporate employers, as agents, ostensibly within the scope of their duties.

A review of a recent Ontario Court of Appeal decision, ADGA Systems International Ltd. v. Valcom Ltd. (1999), 168 D.L.R. (4th) 351, 39 C.C.E.L. (2d)163 (Ont. C.A.) [*099018028 - 24 pp.], revg 33 C.C.E.L. (2d)135,105 O.A.C. 209 (Div. Ct.) [*097289014 - 17 pp.], and the decisions which preceded it on the original motion and in the Divisional Court, reflect the degree of uncertainty in the application of the legal principles involved in relieving individuals from liability for actions they undertook on behalf of their corporate employer. In ADGA, the plaintiff sued a competitor, Valcom Ltd., claiming that it raided the plaintiff's employees and caused the plaintiff damages by interfering with the contractual relations between ADGA and its employees when it convinced them to quit their employment and join Valcom. In that lawsuit the plaintiff also claimed against the sole director of Valcom and two of its employees that they, personally, were liable for inducing certain of the ADGA employees to breach their fiduciary duties with ADGA and join Valcom.

The three personal defendants brought a motion for summary judgment to dismiss the action as against themselves. The judge on the motion ruled that there appeared to be at least one triable issue which could not be determined by way of a summary judgment and dismissed the personal defendants' motion. They appealed that ruling to the Divisional Court which ordered that the action be dismissed against the personal defendants since those employees of Valcom did not advance their personal interests by their actions, but were pursuing their duties and furthering the interests of their employer, Valcom.

The plaintiff had a contract with Correctional Services Canada to provide technical support and maintenance of security systems in the federal prisons. The contract was coming up for renewal and the federal government initiated a call for tenders. In its tender, the government required, as a condition, that any tendering party list the names of 25 senior technicians, together with their qualifications. The plaintiff had 45 such employees and, it is alleged, its competitor in the bidding process, Valcom, had none. ADGA alleged in its statement of claim that the defendant and the three personal defendants embarked upon a plan to convince the plaintiff's technical staff to allow Valcom to use their names on the tender and to join Valcom if it won the contract. Allegedly, 44 of the plaintiff's technical staff agreed to the use of their names by Valcom as a result of the efforts of the three personal defendants.

The issue identified by the Court of Appeal [at p. 355] was 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".

At the outset Carthy J.A., writing for the Court of Appeal, observed that the Divisional Court did express a valid policy concern over the proliferation of claims against officers and directors of corporations as a means to leverage an advantage in a civil action against their employers. Notwithstanding that mischief, the court went on to analyze the development of the law prohibiting the piercing of the corporate veil and the subtle distinctions which have allowed directors and officers to be held personally liable for actions involving their employers. The legal analysis involved the following quote from Iacobucci J. in London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992), 97 D.L.R. (4th) 261 at p. 337, [1992] 3 S.C.R. 299:

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.

In deciding to allow the appeal from the Divisional Court, Carthy J.A. presented a balanced review of the case law and the policy considerations which require a scrupulous assessment of the pleadings of each case involving personal defendants who have acted on behalf of their corporate employers. The most succinct message for employers and their agents, whether directors, officers or employees, is to be found in Carthy J.A.'s conclusion in ADGA, which provides as follows [at p. 365]:

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.

It is not sufficient for an employee to hide behind the corporate veil of the employer and declare that his or her actions were not conducted for any personal gain but for the corporate good in order to avoid potential personal liability. While the decision in ADGA is only at the summary judgment motion level and we will have to wait for a decision at trial for further guidance, this decision makes it clear that personal liability of employees or directors is possible.

This article is excerpted from The Employment Bulletin.
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