Piercing the Corporate Veil in Construction: When Work is So Bad it Amounts to Fraud
It can be frustrating for homeowners dealing with inadequate contractors that the controlling mind/primary owner of the company can hide behind their corporation to avoid personal liability. Often poor work by contractor is a symptom of the company going through a larger crisis in which it has failed to meet a number of obligations to various parties all of which has caused creditors and claimants to line up to get a piece of a company which may have little, if any, assets.
The case of Koltai v Hauser, 2017 BCSC 1675 (CanLII) concerns the limited circumstances in which the courts will “pierce the corporate veil” and find that the controlling mind, owner and or director behind a company is responsible for the liabilities of a company. Often such controlling minds, owners and directors may have more assets capable of seizure than a failing company.
As was observed in Koltai, corporations exist as separate legal entities and, generally, the recourse against a corporation is limited to recovering against the corporation and not those that own or control it. In respect of piercing the corporate veil, the court reviewed authorities at paras. 32-34 which previously held, among other things, that:
- the courts might disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct;
- control is more than mere ownership;
- conduct that might support the court piercing the corporate veil would be conduct akin to fraud that would otherwise unjustly deprive claimants of rights;
- courts can pierce the corporate veil when a company is formed for the express purpose of doing a wrongful or lawful act or, if when formed, the parties controlling the company direct it to do a wrongful thing; and
- the corporate veil may be pierced in instances or fraud or improper conduct where the corporation is being used to effect a purpose or commit an act which the owners could not effect or commit.
In Koltari, the alleged breaches of contract and negligence included:
- failing to perform the renovation in a timely, workmanlike and proper fashion;
- failing to comply with regulations etc. with respect to the work that was done;
- failing to acquire the proper building permit;
- removing a load bearing wall without proper inspection or support;
- damaging the premises and leaving debris; and
- that the $93,000 paid to him on the fixed price contract originally valued at $84,997.50 had been utilized for gambling, paying the personal defendant’s mortgage, paying coworkers, paying personal debts and paying other judgment creditors.
The defendants disputed little of the allegations against them other than that the contract in question was between the plaintiff and corporate defendant only. The defendants admitted that they had “totally screwed up” on the project and were in over their heads.
The court held that before it was not a case where an owners was simply dissatisfied with the work of a contractor; rather, the work in question was beyond deficient and the contractor had failed so fully that its conduct amounted to fraud. The personal defendant had willfully failed to comply with the terms of the contract and to perform the most basic elements of construction. In all the circumstances the court found both the corporate defendant and personal defendant liable for the corporate defendant’s conduct.
It appears significant to the court finding it could pierce the corporate veil that the corporate defendant having acquired $93,000 to pay for services which funds were fraudulently used for a number of unrelated purposes.
Koltari should not be confused with suggesting that piercing the corporate veil is ordinarily available even in some of the more egregious instances of negligent construction, but is illustrative that there are instances in which the work of a contracting company crosses the line between negligence and fraud. Where that line is crossed, recovery is possible against the party who owns and/or controls the contracting company.
Koltari also serves as a reminder that construction/remediation contracts serve both parties best when they clearly detail expectations of the parties, what funds are due when and how funds are to be applied.
Jeremy Burgess is a litigation associate at Pushor Mitchell. If you have any questions about a potential legal dispute concerning a construction contract, he’d be happy to assist you. Feel free to contact Jeremy in a confidential manner toll free at 1-800-558-1155 or at firstname.lastname@example.org. You may also contact our litigation group.
The foregoing is for informational purposes only and is not legal advice, nor should be construed as such.