Fiduciary Duties to a Corporation: Will the Court Extend the Duty to Third Parties?

By Jeremy Burgess
Categories: Blog, Litigation

A fiduciary relationship is a relationship in which one party places distinct trust, confidence and dependence on another. In Canadian law, directors are fiduciaries of the corporations for which they act. This is expressed, for example, in Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 at paras. 34 to 39 and has been codified into s. 122(1)(a) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 and s. 142(1) of the B.C. Business Corporations Act, S.B.C. 2002, c. 57.

There is no fixed set of rules for what fiduciary duties are owed by a fiduciary; rather, the Courts examine facts to determine what fiduciary obligations might exist in which situations (Blue Line Hockey Acquisition Co. v. Orca Bay Hockey Limited Partnership, 2009 BCCA 34 at para. 56). Despite that, case law has developed a generalized guideline to examining fiduciary duties and such duties are guided by concepts of a duty of good faith, a duty of loyalty and a duty of disclosure.

In the recent case of WestCorp Solutions Ltd. v Lancaster, 2018 BCSC 789 (CanLII), the court was called upon to determine how far the concept of fiduciary duties might be stretched to provide relief for a company when their director breaches his or her fiduciary duties.

In the case, Mr. Collins was formerly a director of the Plaintiff, WestCorp, who admitted that he breached his fiduciary duties to WestCorp by secretly incorporating a company described in the case as PSE along with his business relation, Mr. Lancaster, in order to usurp a corporate opportunity of WestCorp. The case turned on the degree to which WestCorp could seek relief against Mr. Lancaster and PSE for being parties to Mr. Collins’ breaches of his fiduciary duties.

The court started its analysis of the law by confirming that directors of a corporation are precluded from obtaining any property or business advantage belonging to a company or which the company was negotiating if done secretly or without approval. Approval requires full disclosure of facts to be meaningful. Mr. Collins breached that duty when he incorporated PSE and obtained opportunities which belonged to WestCorp. Mr. Collins worsened his breach by failing to disclosure his conflict of interest even in the face of statutory demand to do so. Mr. Collins’ conduct was characterized as equitable fraud.

The court went on to confirm Mr. Lancaster was deemed to have known of Mr. Collins’ fiduciary obligations and to recite law (Air Canada v. M & L Travel Ltd., 1993 CanLII 33 (SCC), [1993] 3 S.C.R. 787) which confirmed that a person could be found liable for participating in a breach of trust where:

  1. there is a fiduciary duty;
  2. the fiduciary breached that duty fraudulently and dishonestly;
  3. the stranger (Mr. Lancaster) to the fiduciary relationship must have knowledge of both the fiduciary relationship and the dishonestly/fraudulent conduct of the fiduciary; and
  4. the stranger must have participated in the dishonestly/fraudulent conduct of the fiduciary.

The court found that Mr. Collins concealed his involvement in PSE because he was aware of and was attempting to avoid his fiduciary obligations. Mr. Lancaster worked in concert with Mr. Collins to incorporate PSE and keep it secret from WestCorp. At best, Mr. Lancaster was being wilfully blind of Mr. Collins’ duties to WestCorp. Mr. Collins and Mr. Lancaster worked together to try to conceal their involvement in PSE. Mr. Lancaster participated in misleading the CEO of WestCorp with regards to opportunities that PSE was seeking to usurp.

In the end, the court determined that Mr. Lancaster knew of Mr. Collins’ fraudulent and dishonest breaches of his fiduciary duties and participated in same. He ignored the conflicts of interest that Mr. Collins had and participated in the usurping of WestCorp’s opportunities.

Importantly, when crafting a remedy, the court found that liability for a breach of a fiduciary duty is strict and that WestCorp didn’t need to prove it would have obtained the impugned opportunities to claim damages in respect of same. The court ultimately found that the loss of profits related to the impugned opportunities exceeded $1,000,000 but reduced damages 25% for the negative contingencies related to the possibility that such opportunities may not have panned out as anticipated. The court made Mr. Collins, Mr. Lancaster and PSE jointly and severally liable for the damages but relieved Mr. Collins from payment as he has already paid $450,000 in settlement.

WestCorp Solutions Ltd. v Lancaster is illustrative of the fact that parties who participate in breaches of fiduciary duties may wear the same liability as the fiduciary they act in concert with. The duties that a director or officer may owe a company are treated seriously by the court and a great deal of law has been made to give corporations the teeth necessary to seek recompense for directors or officers who might steal a corporation’s opportunities. A director or officer can participate in seeking to obtain an opportunity of a corporation, but that requires full disclosure of the intention to do so and the related conflict that arises as a result.

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Jeremy Burgess is a litigation associate at Pushor Mitchell with broad experience in litigation. If you have any questions about a legal dispute, we’d be happy to assist you. Feel free to contact Jeremy in a confidential manner toll free at 1-800-558-1155 or at burgess@pushormitchell.com. 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.