Thinly veiled – will incorporating protect you from personal liability?

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Publication March 2019

Can an individual be held personally liable for torts committed in his or her capacity as an employee of a corporation?

This issue has been the subject of law school and judicial debate for some time. Last week, the Alberta Court of Appeal endeavoured to offer some clarity in Hall v Stewart.

Background

The defendant, Doug Stewart, was a director and employee of DWS Construction Ltd. DWS was working on a new home construction in which Stewart installed a temporary staircase.

The plaintiffs, who were employees of a different company working on the home, were on the temporary staircase when it collapsed. They suffered injuries that were covered by the Workers’ Compensation Board, and the board then sued Stewart as an individual to get its money back (which is something known as “subrogation”).

One of Stewart’s defences was he was acting in his capacity as an employee of DWS when he installed the staircase, thereby shielding him from personal liability.

The court rejected that defence and found him personally liable for the plaintiffs’ injuries.

Analysis

The general rule in its simplest terms is corporations are treated as people under the law, and people performing services on behalf of a corporation (e.g., employees) cannot be held personally liable if those services go wrong.

This is a key reason why many businesses choose to incorporate. It can be a useful tool for ensuring that if something does go wrong, only the corporation’s assets are at risk. This allows individuals performing services on behalf of a corporation not to worry about losing their homes or savings if something goes wrong. In fact, the Court of Appeal goes so far as to describe treating corporations as separate people as “an essential tool of social and economic policy.”

However, as is usually the case with any general rule, there are exceptions. Corporations are a tool that can be misused. For example, it is usually not appropriate to move assets into a corporation after being sued and then claim “I have nothing to offer!” It is also usually not appropriate to use a corporation to commit an illegal act and then claim “The corporation did it!” if you get caught.

This case was less clear than in the examples above. There was no evidence Stewart intentionally mis-installed the stairs, nor that he was doing something other than what DWS was hired to do. Something simply went wrong.

The challenge Stewart faced in avoiding personal liability was that under the WCB system in Alberta, employers cannot be sued. DWS was an employer, therefore prohibiting the board from suing it. The board’s only option was to try and sue Stewart individually.

Although DWS Ltd. was deemed an employer under the Alberta WCB regime and thus immune from suit, DWS himself as a director of the company could not avail himself of the WCB immunity from suit unless extra WCB coverage was bought to protect DWS personally both as a worker and company director.

The court wrestled with how to deal with this. On one hand, this is a fairly typical example of when it would be appropriate to sue the corporation and not the individual. On the other hand, people were injured and legislation prevented the corporation from being held accountable. It is also worth noting Stewart could have protected himself under the WCB regime by purchasing extra coverage for himself as a director and employee of DWS, but he did not do so.

The court also noted the law is not clear on when an individual can be held liable for things that would ordinarily be a corporation’s responsibility. There is no clear legal test for figuring this out when something goes wrong, and instead it involves a judge trying to weigh things such as:

  • whether the individual stood to personally gain from the wrongdoing;
  • whether the person who suffered harm knew he or she was dealing with a corporation and what that could mean;
  • whether the corporation chose not to purchase insurance;
  • whether the wrongdoing was something that fell outside the scope of services being performed for the corporation; and
  • whether the harm in question was physical as opposed to economic.

If any of the above statements are true, the court will generally be more willing to hold an individual personally liable.

Notwithstanding the court’s acknowledgement that everyone involved knew the work in question would be carried out by corporations, that the work in question was carried out on behalf of and in the best interests of the corporation, and that Stewart had no ulterior motive or interest in carrying out the work, the court found Stewart personally liable.

According to the court, the “deciding factor” was the harm in question was physical as opposed to economic. To summarize, while the court acknowledged this case could have had a different outcome if it concerned a purely economic loss, “There are strong public policy reasons to ensure that physically injured plaintiffs are compensated.”

These public policy reasons appear to be enough to carry the day, even in the absence of other reasons for finding someone individually liable.

Take-away

If you type “should I incorporate?” into a search engine, you will likely see lots of people telling you it is a good idea. It certainly can be a good idea for many businesses. However, it would be a bad idea to incorporate and then think your individual assets are protected no matter what happens.

Whether you are already incorporated or thinking of incorporating, the reality is there are lots of exceptions to the general rule of separate corporate personhood, and this case highlights that it is not easy to predict when they might apply.

There are things you can do to increase your odds that an exception will not apply – getting the appropriate insurance, clearly documenting when someone is performing services on behalf of the corporation, and properly supervising people who do work for the corporation are just a few examples. However, they may not always be enough.

This case should serve as a reminder that public safety is paramount and will often trump a defence based on separate corporate personhood. Although corporations are “an essential tool of social and economic policy,” the “strong public policy reasons to ensure that physically injured plaintiffs are compensated” is often the winning hand.


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