Introduction

A corporation is a fictional creation of the law. It is treated as a legal entity, and this fact creates a legal trinity of the company, its owners (shareholders) and its employees. Although they are treated, and have similar rights, as a natural person, they can only act through natural persons. How then could a corporation ever possess the requisite mens rea (Latin for “guilty mind”), or intent, to support a criminal conviction or a civil liability for wrongdoing?

Identification Theory

The Supreme Court of Canada (SCC) dealt with this question in its decision in Canadian Dredge & Dock Company v. The Queen. The SCC established that a corporation could be found criminally or civilly responsible through identification theory. Where the crown can establish that the action taken by the directing mind;

1. Was within the field of operation assigned to the actor;
2. Was not totally in fraud of the corporation; and,
3. Was by design or result for the benefit of the company.

This decision related to an appeal by four corporations found guilty of collusive bidding for public contracts to perform dredging work in the St. Lawrence River and the Great Lakes. The bidding was prepared by employees who each had the responsibility of making such tenders on behalf of their employer companies. These managers worked with one another to ensure that all of the companies benefited through controlled bidding, including payments to be made to the higher bidders or for not bidding at all. The managers met to adjust accounts periodically. They also benefitted personally from their efforts. The result was a higher cost to the public in that the work would otherwise have been accomplished through true competitive bidding.

The Defence’s Position

The corporations took the position that they had a defence because:

1. The companies had not instructed the managers to perform the criminal behaviour;
2. The managers also defrauded the companies and made personal gains as a result;
3. The companies had policies that specifically prohibited the behaviour in question.

These defences were rejected by the SCC. As a result, the test for finding corporate responsibility was established.

A Further Fourth Element of the Test

The SCC dealt with the issues again in Deloitte & Touche v. Livent Inc. The decision held that a court has the discretion not to apply the identification doctrine if it determines that it would be against the public interest to do so.

The Temporary Confusion

The Ontario Court of Appeal (ONCA) had to apply the test in DBDC Spadina Ltd. v. Walton which involved an appeal by one group of investors who had been defrauded by the investment promoter. They were seeking to have civil liability attach to another group of defrauded investors based on the allegation that the promoter was the alter ego of the competing defrauded companies. In the decision the majority stated:

Before turning to these criteria, I think it is useful to recognize the setting in which they are being considered. The case law has applied Canadian Dredge in the criminal and civil contexts without discrimination. In my view, it does not follow, however, that the criteria need be applied in a rigid, identical, fashion in all circumstances. The burden of proof is less onerous in civil cases. This particular civil case involves a complex multi-real estate transaction investment fraud, perpetrated over an extended period of time, and implicating numerous corporate actors (operating at the instance of the fraudster) and numerous victims. In these circumstances, it makes sense that, of the Canadian Dredge criteria, (b) and (c) at least may be approached in a less demanding fashion than would be the case were mens rea for purposes of establishing criminal responsibility in play.

Contrary to the view expressed by my colleague [the dissent], I do not think it is the case in such circumstances that the claimant must necessarily show “evidence of each company’s individual benefit from the scheme”. As noted earlier, and as I shall explain more fully below, liability for knowing assistance is fault-based rather than receipt-based and does not require the defendant to have obtained a benefit from the defaulting fiduciary’s breach. To apply criterion (c) of Canadian Dredge – “by design or result partly for the benefit of the company” – too strictly, therefore, makes little sense, as it would risk muddying the distinction between the two categories of claim.

…

In my view, policy considerations support a more flexible approach in complex and large, multi-corporation, multi-party fraud cases such as the present one, for the reasons I set out below. I do not think, in these circumstances, that it matters whether the flexibility is applied at the criteria-application phase or the overall-equitable consideration stage of the analysis.

As a result, the appeal was allowed and liability was found, overturning the trial decision. The dissent, however, was strongly worded and would not have found liability based on an application of all of the criteria established by the SCC in Canadian Dredge.

The decision understandably caused confusion and concern in the minds of the business community. A less-demanding approach meant that civil liability, at least, could be found even where the Canadian Dredge test was not met.

The Clarification

The decision was appealed to the SCC and in Christine DeJong Medicine Professional Corporation v. DBDC Spadina Ltd., the court allowed the appeal and adopted the dissent reasons as their own. Further, the SCC made it clear that all of the criteria established in Canadian Dredge must be present in order to establish liability:

In view of the statement of the majority at the Court of Appeal that this Court’s decision in Deloitte & Touche v. Livent Inc., invited a “flexible” application of the criteria stated in Canadian Dredge for attributing individual wrongdoing to a corporation, we respectfully add this. What the Court directed in Livent, at para. 104, was that even where those criteria are satisfied, “courts retain the discretion to refrain from applying [corporate attribution] where, in the circumstances of the case, it would not be in the public interest to do so” (emphasis added). In other words, while the presence of public interest concerns may heighten the burden on the party seeking to have the actions of a directing mind attributed to a corporation, Canadian Dredge states the minimal criteria that must always be met.

The exceptional team of Toronto corporate commercial lawyers at Milosevic & Associates regularly represent clients in complex commercial litigation matters before all levels of the court system. We can provide you with advice and guidance suited to your unique situation. Call us at 416-916-1387 or contact us online to learn more about how we can help.