Ontario Court of Appeal Affirms Fraud as Independent Basis for Director Liability

It is well-established that Canadian law shields directors and officers from personal liability for corporate acts, except in circumstances that justify piercing the corporate veil. In CHU de Québec-Université Laval v. Tree of Knowledge International Corp., the Ontario Court of Appeal confirmed that fraudulent conduct is also a basis for imposing personal liability on officers and directors of a corporation, even where the test for piercing the corporate veil is not met.

Background Facts

During the COVID-19 pandemic, CHU entered into an agreement with Tree of Knowledge Inc. (TOKI) for the supply of three million certified N95 masks, in exchange for US$11-million, which was to be paid prior to delivery. Mr. Caridi, an officer and the sole director of TOKI, negotiated the agreement and personally received some of the funds. Despite receiving full payment, TOKI never delivered any certified masks to CHU. 

The trial judge found Mr. Caridi personally liable for civil fraud and ordered him to pay CHU over US$11-million — despite declining to pierce the corporate veil. The trial judge found that Mr. Caridi was reckless in representing that TOKI could satisfy its contractual obligations in the absence of any confirmation that TOKI could actually source the masks. The trial judge also found Mr. Caridi personally liable because his conduct was (1) “tortious in itself” and (2) exhibited a “separate identity or interest” from the corporation.

Court of Appeal Decision

Mr. Caridi challenged the trial decision on multiple grounds, including that the judge applied too low a threshold for finding recklessness and erred in finding him personally liable for civil fraud.

The Ontario Court of Appeal dismissed the appeal, finding that the trial judge did not apply too low a threshold for recklessness, nor err in finding Mr. Caridi personally liable. The Court concluded that Mr. Caridi acted recklessly by representing to CHU that, if paid in advance, TOKI could satisfy the order because Mr. Caridi had no regard to whether that statement was true, nor did he take any actions to confirm its truth. 

The Court also confirmed that Mr. Caridi’s status as an officer and director of TOKI did not form the basis for his personal liability. Rather, his liability was for direct fraudulent misrepresentations while he was a director and officer of TOKI. Piercing the corporate veil requires that an officer or director use the corporation as a “mere puppet” to shield the officer or director from liability for improper conduct. The Court in this case clarified that in some circumstances, officers and directors can be held personally liable without piercing the corporate veil — such as where the acts of the officer or director (1) are tortious in themselves or (2) exhibit a separate identity or interest from the corporation. 

Despite acknowledging that fraudulent conduct is consistent with both categories, the Court confirmed that fraud should lead to personal liability regardless of and separate from these categories. In the Court’s view, “direct participation in fraud is a … standalone basis for directors’ and officers’ personal liability,” even when it occurs in the course of their duties for a corporation. Since Mr. Caridi’s personal conduct satisfied the test for fraud, the Court held that the trial judge did not err in holding Mr. Caridi personally liable for damages.

Key Takeaways

In Ontario, personal liability for officers and directors can exist without piercing the corporate veil even if the impugned conduct was in the interests of the corporation. While the CHU de Québec-Université Laval v. Tree of Knowledge International Corp. decision involves fraud, the law remains unclear on the threshold of conduct necessary to establish personal liability. Officers and directors should exercise caution in performing their duties to ensure they are not creating personal liability.

For more information, please contact the authors or any other member of our Litigation & Dispute Resolution group.