Paralegal sole-proprietor Scott McEachern shares advice on why paralegals should advise small business owners to beware of directors’ liability risks.
Let me start by saying that this article will likely get much feedback flack from paralegals, regarding the giving of advice that stems from a corporate law issue. Unfortunately, this is one of those rock and hard place issues where you may be damned if you do and damned if you don’t. As we paralegals know, we are exposed to errors & omissions risks on a daily basis, as well as the potential for LSUC attention.
So, how do we balance the concern when we have a client that needs guidance on a tort law matter that involves strategies deriving from corporate law principles? My view is that we must focus on the tort law issue and how the tort case involves, or relates to, or evolves from, corporate law issues. Of course, be sure to familiarize yourself with basic corporate law principles and how these come into play within a tort action, prior to advising on any corporate law-derived tort case strategy. Be sure to advise your client to refer to a lawyer for any genuine corporate law questions.
Having said that, and stressing that focus and advice must remain on tort law strategies, I’ll discuss when and how to toe this line.
False Sense of Litigation Security
Too many small business owners enjoy a false sense of security from the misperception that litigation with potential personal liability cannot be brought against the directors or officers of a corporation. When a legal action is brought, involving tort law issues — wherein a small business corporation and the owner of the small business corporation are both named as Defendants — the small business owner, often in a dazed and perplexed manner, will ask and argue, “Why am I being sued? My business is incorporated; I am protected by the corporate veil.”
As a lawyer can fully explain and advise, the “corporate veil” that protects directors and officers of corporations has many holes. Some holes are statutorily imposed and some holes arise from the common law.
For directors and officers of contracting corporations (my market of focus), common statutory director’s liability concerns may involve unpaid wages under the Employment Standards Act, unpaid taxes under provincial and federal statutes, and pollution clean-up under the Environmental Protection Act. Again, defer to a lawyer for more information in this regard.
Personal Responsibility Derives From Conduct
As for the common law and tort claims, the owners of small business corporations should concern themselves with the potential for personal litigation and personal liability that arises in tort law matters, where the owner was directly involved in the wrongful conduct that gives rise to the legal action. The common law says that a director or officer of a corporation may be without corporate veil protection.
Specifically, the courts have ruled that, “Where those actions are themselves tortious or exhibit identity or interest from that of the corporation so as to make the act or conduct complained of their own, they may well attract personal liability.”
This may occur when:
- The director or officer was a culpable hands-on participant in the tortious act;
- The director or officer wore a separate identity, beyond director or officer during the tortious act; and
- The director or officer stands to personally benefit by the tortious act.
Small business corporations almost always have the daily operations performed by the director, officer or owner, so the business owner may be personally named in litigation.
As a Plaintiff’s paralegal, personally naming the owner of the small business corporation may be advantageous in helping to build a bigger “pot of gold” that will aid subsequent enforcement of judgment. Oftentimes, the small business owner has deeper pockets than the small business corporation.
As an example, I am currently working a case for a Plaintiff homeowner involving faulty workmanship allegations against a contractor. In this case, we have named both the corporate business entity as well as the business owner as Defendants. As the business owner took off his “director and officer hat” to perform in the roles of estimator, salesman, on-site foreman, and labourer, we have hands-on and “separate identity” participation in the alleged faulty workmanship (cutting corners).
Separate Identity in Decision-Making a Factor
Furthermore, as the sole owner of a for-profit corporation, in which the profits received and value of the corporation will be of personal benefit, the last of the three factors necessary in piercing the corporate veil appears to be present as well.
Bear in mind that a director of a corporation is wearing a director’s hat when decisions are made relating to the breach of the corporation’s contracts. The decision to engage in breach of contract, as well as the directly related tort of inducing breach of contract, or interference in contractual relations, are decisions within the scope of a director’s duties. Claims should not be brought against a director in these situations.
Accordingly, if the owner of a small business corporation decides that the corporation is not paying certain bills for goods purchased or services rendered, litigation against the director remains off limits. As above, unless it can be shown that the director culpably engaged in tortious conduct while wearing a personal identity, rather than the director identity, and with a personal, rather than a purely corporate benefit, the corporate veil protection likely applies.
Relevant Case Law:
AGDA Systems International Ltd. v. Valcom Ltd., 1999 CanLII 1527 (ON CA)
1175777 Ontario Limited v. Magna International Inc., 2001 CanLII 8529 (ON CA)
Blacklaws v. Morrow, 2000 ABCA 175
Said v. Butt,  3 K.B. 497
(Created the “Said v. Butt Exception” in a defence)
Prior to becoming a licensed paralegal, Scott McEachern was an insurance broker, licensed by the Registered Insurance Brokers of Ontario.
As a consulting insurance professional, Scott guided corporate clients, primarily client’s within the contracting trades, with technically challenging risk management challenges and insurance concerns. He proactively sought to assist clients in the understanding and development of low-cost risk management strategies as a means to avoid or lessen risk exposures, and to obtain insurance coverage and insurance pricing advantages. Scott conceived and developed numerous specialty insurance programs, serving the unique interests of a variety of business sectors.
As a paralegal studies student, Scott garnered the Durham Region Chairman’s Scholarship Award and was recognized as the Highest Ranking Graduate by finishing with a 4.96/5.00 GPA.
After successfully passing the Law Society of Upper Canada licensing exam, he started out with a small paralegal services firm and has subsequently become an independent operator. Scott works primarily in the Small Claims Court, focusing on disputes involving contractors. He also takes on cases involving the intentional torts, including those known as the “business torts,” such as wrongful interference, conspiracy to injure by unlawful means, deceit by fraudulent misrepresentation, and others.
Over the years, Scott has contributed to various trade associations, professional associations and community organizations, sharing knowledge and expertise through presentations at seminar conferences, community colleges and general business meetings.
Reach Scott at: 905-259-5460; or firstname.lastname@example.org