Securing corporate accountability through economic torts

Par Alexander Gay and Kirk G. Shannon octobre 31, 201831 octobre 2018

Securing corporate accountability through economic torts

 

Piercing a corporate veil to hold the guiding mind of a corporation accountable for wrongdoing is not easy. The legal threshold is high. However, there are other ways to go after rogue directors who step out of their corporate role and fail to act in the interest of a corporation, such as claiming liability for economic torts. Economic torts speak to commercial behaviour that offends our basic values as a society an can all be of assistance in securing corporate accountability.

The recent UK ruling in Palmer Birch (a partnership) v Lloyd illustrates how. There is nothing unique about this case, other than how the distinct legal personality of the corporation did not dissuade the court from applying economic torts against directors personally.

It involved an action brought by the plaintiff against two directors for inducement of breach of contract, unlawful interference and unlawful means conspiracy. The plaintiff entered into a construction contract with HHL, a corporate entity controlled by two directors, one of whom was to be the beneficiary of the work performed under the contract. The directors stopped funding HHL and liquidated the company once a substantial portion of the construction work had been completed. The directors denied liability and argued that the plaintiff’s claims were an ill-conceived attempt to pierce the corporate veil. They argued that the losses were nothing more than a poor commercial deal for the plaintiff and the claims were limited to the company.

The court concluded that there had been an inducement of a breach of contract and an unlawful means conspiracy by the directors. They allegedly placed the company into liquidation to avoid paying HHL’s outstanding debts to a building contractor, while benefiting from the completed work. The corporate veil did not stand in the way of a remedy against the directors.

What’s more, one director made a number of decisions that diverted funds away from the company leading to its liquidation. That was intentional and amounted to an inducement of a breach of contract.

We’d likely have reached the same conclusions under Canadian law, where the four elements of the tort are the following: (a) the defendant knew of the contract between the plaintiff and the third party; (b) his conduct was intended to cause the third party to breach the contract; (c) it caused the third party to breach the contract; and (d) the plaintiff suffered damages as a result.. Even the so-called exception to personal liability for the tort outlined in Said v. Butt would not apply as the directing minds of the breach were acting in their own personal interests and not in the best interests of the corporation. Indeed, one of the key findings in Palmer that allowed the court to apply the economic torts to the directors was that they acted in their own interest and not for the benefit of the company.

The court also held that the directors were liable for conspiring to injure by unlawful means because they had colluded to bring about the repudiatory breach. They agreed to cause the liquidation of the company to avoid obligations under the contract and to reap the benefit of the work through another company. In Canada, the tort is the same and requires that: (a) the defendants’ conduct was unlawful; (b) it was directed at the plaintiffs “alone or together with others”; (c) the defendants knew that, in the circumstances, injury to the plaintiff was “likely”, or should have known that injury to the plaintiff would ensue it would happen; and (d) actual injury resulted. Once again, even if the exception in Said v. Butt were to apply to conspiracy to injure claims (see 1175777 Ontario Ltd. v. Magna International Inc), it would not apply to the Palmer fact scenario, as the directors were not acting in the best interest of the corporation.

The Palmer case is interesting because corporate directors tried to deflect personal responsibility by hiding behind the distinct legal personality of the corporation. The court disagreed. It held that the legal distinctness of the corporation was largely shredded by a combination of the directors’ own actions and abnegation of their directors’ roles during the life of the contract. They could not attribute their individual acts to the corporation to avoid liability. The court showed a willingness to address the conduct of the directors as separate and apart from the corporation.

It’s important to achieve a balance between upholding the broader economic objectives of a modern capitalist economy and ensuring that rogue directors of corporations are held to account for injurious commercial conduct. Economic torts are not outside the reach of plaintiffs and help temper certain conduct, in a commercial context, that offend our values as a society. They are also of great assistance in providing guidance regarding what is unacceptable business behaviour.

Alexander Gay is a senior litigation counsel at the Department of Justice. He maintains a broad civil litigation practice, with an emphasis on commercial and trade disputes. He is a part-time professor at the University of Ottawa Faculty of Law. Kirk Shannon has a civil litigation practice with the Department of Justice in Ottawa. He is a part-time professor at the University of Ottawa and is a member of the Ontario, Quebec and New York State bars. The authors’ views are their own.

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