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Legal Notes: Understanding corporations and their veil of protection

John Bleasby
Legal Notes: Understanding corporations and their veil of protection

One of the most important reasons for incorporation is that a separate corporate personality, or “corporate veil,” can shield owners and directors from any liabilities associated with company debts and actions. It’s a legal concept that has been upheld for more than 120 years, based on the famous Salomon vs. Salomon case in the U.K.

Although challenging, attempts to pierce the corporate veil are not uncommon. In fact, there are exceptions to the protections offered.

As Miller Thomson LLP associate Bronwhyn Simmons and Usama Rashid write, “One of the exceptions to this doctrine is where a director of a corporation commits a tort or is negligent in a way that is so separate from the interests of the corporation that the negligence or tort cannot be attributed back to the corporation, even if that director was acting in the course of his duties as director of the corporation.”

In 2011, homeowner Larry Parks undertook an oral contract with builder Steve McAvoy and McAvoy’s company, Woodparke Homes Ltd., for a $4 million home. It was completed in 2014. However, Woods deemed it unliveable after only three years of occupancy due to defects traced to water ingress.

Parks applied for a summary judgment against McAvoy, claiming instances of financial wrongdoing, negligence and breach of trust. He further alleged McAvoy “had been a party to the contract in his personal capacity,” write Simmons and Rashid.

The court ruled it could not grant a summary judgment for several reasons, write Simmons and Rashid.  These included contradictory evidence including that from expert witnesses, insufficient evidence surrounding the cause of the defects, and the number of third parties involved in the project who had not presented evidence.

“There was no efficiency in summarily granting judgment to the plaintiff on some of his claims when other claims would remain for trial.”

As for the suggestion that McAvoy and Woodparke Homes were both party to the oral contract, the court noted all invoices were issued by, and payments made to, Woodparke Homes not McAvoy. All monies received were deposited into the company bank account. Any personal assurances made by McAvoy about his commitment to the project were deemed as standard verbiage for any builder and not grounds for personal liability.

Furthermore, any negligence falling on McAvoy for failing to identify and repair construction deficiencies were, as Simmons and Rahsid write, “exactly the same as the negligent acts committed by Woodparke, (therefore) there was no separate identity to the acts, and accordingly, no personal liability for McAvoy.”

As Toronto-based law firm Goldman Sloan Nash and Haber LLP describes, it all traces back to the Salomon vs. Salomon case in the late 1800s.

“A corporation cannot do anything unless an individual acts on its behalf. Nonetheless, it has been settled law for over 120 years that a corporation exists as a separate legal entity, and is distinct from its shareholders, directors and officers.”

However, that’s not to say the veil can never be pierced.

If the company has been established for a fraudulent purpose, or is dominated and controlled by those seeking such purposes, the court could look towards the “directing mind” of that corporation and impose liability on them, writes Goldman Sloan Nash and Haber.

“If a corporation misappropriates trust funds it receives relating to a particular construction project, the individuals who have effective control of the corporation may be held personally liable along with the corporation.”

As a precaution for owners, Goldman Sloan Nash and Haber put forward the option of analyzing any risks associated with the contracted corporation and, if necessary, attempting to secure personal guarantees from owners or shareholders.

Proving personal liability either alongside or in place of corporate liability will remain a challenge. Simmons and Rashid also point out the “proper invoice” requirements, under prompt payment and adjudication regimes now in effect in several provinces, “will theoretically eliminate confusion about who the parties to a construction contract actually are.”

John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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