Supreme Court of Canada rules on attributing fraud to corporate entities
In reversing the appellate court’s decision, a unanimous Supreme Court held that the DeJongs’ companies were not liable for the fraud. Traditionally, the corporate attribution doctrine required the following key elements to be made out before the mental state of a directing mind, such as a key employee, officer, or director, could be attributed to a corporation: the actions taken by the individual directing mind, (1) were within the field of operation assigned to him/her; (2) were not totally in fraud of the corporation; and (3) were by design or result partly for the benefit of the corporation. The court found that courts have no discretion to attribute an individual’s acts to the corporation where these minimum criteria are not met. Conversely, however, where it would be contrary to public policy to attribute wrongful acts to the corporation, courts have the ability to find that the company and its individual employees are separate such that the company cannot be held liable for those employees’ wrongful acts. In this case specifically, the court found that the knowledge of the Waltons could not be attributed to the DeJongs’ companies, as the Waltons’ actions were in fraud of those companies and not for their benefit. As such, Bernstein’s claim against the DeJongs’ companies could not be made out. The court also stated that, for the action of knowing assistance to succeed, the assistance must take the form of specific conduct – being a pawn or conduit is not enough. Rather, the defendant must have taken some sort of specific action to assist the fiduciary in its breach of fiduciary duty. There was no evidence in this case that the DeJongs’ companies had taken any action to assist in the fraud.
Many liability insurance policies that provide some measure of coverage for the corporate entity, such as a directors’ and officers’ (D&O) liability insurance policy, contain provisions that specify the circumstances in which knowledge of certain key individuals can be attributed to the organization. D&O insurance can provide financial protection not only for executives and board members when faced with a third-party liability claim, but also the organization. While public companies are limited to coverage for securities claims, non-public companies benefit from broader coverage limited only by the terms, conditions and exclusions of the policy. The most favourable policies will contain language that imputes only the conduct and knowledge of key executives, such as the CEO and CFO, to the organization for purposes of determining the entity’s entitlement to coverage. In this manner, actions of other rogue employees cannot be imputed to the organization under the policy, thus narrowing the potential scope of the common law doctrine of corporate attribution by contract.