Course:Business Organizations - LAW 459/Unit 5

From UBC Wiki

UNIT 5 (weeks 6 & 7): CORPORATE OBLIGATIONS

Unit-5-2-e1468620835852-225x300.jpg

Figure 5: Two old large seals that once were necessary parts of how corporations bound them selves in law. Generally they are no longer required.

ALT: Two old large seals that once were necessary parts of how corporations bound them selves in law. Generally they are no longer required.

Source of image: Jon Festinger

 

UNIT OVERVIEW:

In this section of the course we consider the parameters by which corporations become obligated or incur liability (criminally or civilly), given that they are not “flesh and blood” but have the rights of a “natural person”.

More specifically, we will consider several questions:

  1. How does a corporation become liable in tort?
  2. How does a corporation commit an offence and does the answer to this question depend on whether the offence is, or is not, one requiring a “guilty mind” (mens rea)?
  3. How does a corporation incur contractual obligations?

 

UNIT OUTCOME:

In this unit you will learn how to approach the problem of how a company, which you now understand to be an abstract concept, can obligate itself to another person or company. You will come to an understanding of the cases that wrestle with notions and limitations of the “directing mind” of the corporation. You will be able to understand when in the real world the acts of employees may or may not bind the company, either in contract or otherwise under the law, criminal or statutory.

 

UNIT READINGS:

Please read the following materials:

Casebook pages 227-277

BCBCA sections 13 (1) & (2), 17-19, 30-33

Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch), 2012 BCSC 1851 <a href="http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf">http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf</a>

Meridian Global Funds Management Asia Limited v. Securities Commission [1995] UKPC 5 <a href="http://www.bailii.org/uk/cases/UKPC/1995/5.html">http://www.bailii.org/uk/cases/UKPC/1995/5.html</a>

Northern Minerals Investment Corp. v. Mundoro Capital Inc, 2012 BCSC 1090 <a href="http://canlii.ca/t/fs46d">http://canlii.ca/t/fs46d</a>

 

 

TOPIC 1: INTRODUCTION TO CORPORATE OBLIGATIONS

Let us begin with some elementary stuff.

If I do an act, or think a thought, that amounts to a crime or a tort I am responsible for that act or thought and will incur a legal liability as a result.

My liability is personal and direct (as opposed to vicarious or through agency).

But I may also incur a liability indirectly, not for my own acts but for the acts of another – my agent or employee.

This is a result of applying the doctrine of “vicarious liability”.

Vicarious liability is not a distinct tort.   It is, rather, as Major J pointed out in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, [2001] 2 SCR 983:

“…a theory that holds one person responsible for the misconduct of another because of the relationship between them.”

It does not depend on proof of personal wrongdoing on the part of the person who is subject to it.

What are the policy considerations that justify vicarious liability?

  1. Vicarious Liability is a practical remedy for people who are harmed by wrongs of employees or agents of a corporation.
  2. Vicarious Liability is “only fair” in that someone who employs others to advance their own economic interests should be liable for losses incurred in the course of the enterprise. The employer is often best placed to spread losses (often through insurance and higher prices).
  3. Vicarious Liability facilitates the deterrence of future harm – makes employers better able to reduce accidents and intentional wrongs through efficient organization and supervision.

Vicarious liability however is not a substitute for the personal liability of an employee or agent. 

In most tort cases, vicarious liability can be applied without difficulty to situations where employer is a corporation, not an individual. Occasionally, however, an analysis of whether vicarious liability applies in a particular case can run into significant challenges.

 

TOPIC 2: COMMON LAW PRINCIPLES

Please read The “Rhône” v. The “Peter A.B. Widener”  [1993] 1 S.C.R. 497 (SCC) at pages 229-234 of the Casebook.

This is an example of a case where the analysis of whether vicarious liability applies in circumstances was difficult. See if you believe the outcome was fair.

The Peter Widener, a barge owned by Great Lakes Towing Co., collided with the Rhône, a ship at the time moored in Port of Montreal. The Peter Widener was under command of Captain Kelch, who worked for Great Lakes Towing Co.

The owners of the Rhône sued Great Lakes Towing Co. for breach of its towage contract. Great Lakes Towing Co. pleaded a section of Canada Shipping Act that in essence said that in the absence of “his actual fault or privity” the owner of a ship is not in the circumstances liable beyond a certain amount. The section in effect would render the doctrine of vicarious liability irrelevant in the circumstances

The question, then, was whether Great Lakes Towing Co. was guilty of “actual fault or privity”?

The Federal Court of Appeal found there was “actual fault” because Captain Klech was a “directing mind” of Great Lakes Towing Co. The Supreme Court of Canada reversed holding in favour of Great Lakes Towing Co.

Before the Supreme Court of Canada the question seemed to come down to at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as or identified with the fault of the company itself? 

Before delving deeper into how this question ought to be answered, Mr. Justice Iacobucci quoted Viscount Haldane’s decision Lennard's Carrying Co. v. Asiatic Petroleum Co. [1915] A.C. 705:

 

“My Lords, a corporation is an abstraction.  It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.  That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co‑ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company.”

That said the court’s analysis of at what point in the hierarchy of a company is the fault of a person employed in the organization to be treated as or identified with the fault of the company itself can perhaps be broken down to the following process:

 

  • Has the impugned individual been delegated the "governing executive authority" of the company within the scope of his or her authority?
  • That is to say does the discretion conferred on an employee amount to an express or implied delegation of executive authority to design and supervise the implementation of corporate policy rather than simply to carry out such policy.
  • Captain Klech’s negligence in performing navigational duties did not amount to actual fault or privity on the part of corporate owner, Great Lakes Towing Co.
  • It was not sufficient to show that the owner appointed a competent Master of the “Peter A.B. Widener” in Captain Klech – there is also an overall duty of supervision.
  • Were Captain Klech’s faults essentially those of Great Lakes Towing Co. by reason of his position in the hierarchy?

On the facts, the answer to the last question was “no”. Captain Klech was not the directing mind. Perhaps the most compelling answer to this question is in the following quote from Mr. Justice Iacobucci:

 

With respect, I think that the courts below overemphasized the significance of sub‑delegation in this case.  The key factor which distinguishes directing minds from normal employees is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis, whether at head office or across the sea.  While Captain Kelch no doubt had certain decision-making authority on navigational matters as an incident of his role as master of the tug Ohio and was given important operational duties, governing authority over the management and operation of Great Lakes' tugs lay elsewhere.  Therefore, I am of the view that the courts below erred in holding that Captain Kelch was part of the directing mind and will of Great Lakes.  As a result, the collision between the Rhône and the Widener did not occur with the actual fault or privity of Great Lakes.”

The case is interesting on two counts: first, as a rare example, dictated by the language of the Canada Shipping Act, of the solution to a corporate tort problem that does not involve application of principles of vicarious liability.

Secondly, as will be seen, it is important in the context of criminal liability of corporations as expounding the “directing mind test”.

 

 

TOPIC 3: CORPORATE CRIMINAL LIABILITY - MENS REA OFFENCES

Please read pages 234-236 of the Casebook.

For true criminal offences (i.e. those requiring proof of guilty intent), corporations in Canada have been traditionally held liable based on the “identification theory”. That is based on the actions and intent of the senior officers and directors considered to be the “directing minds” of the corporation. The fault of those senior officers and directors is identified with that of the corporation.

Canadian Dredge & Dock Co.v. The Queen [1985] 1 S.C.R. 662 cited in The “Rhone” v. The “Peter A.B. Widener” [1993] 1 S.C.R. 497 accepts a corporate defence where the employee is acting entirely on their own and against the best interests of the company:

Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee‑manager, the employee‑directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts could not be attributed to the corporation under the identification doctrine.”

In Canadian Dredge & Dock Co. v. The Queen the defence raised was that individuals involved in bid-rigging conspiracy were engaged on a frolic of their own, in fraud of their corporate employer and for their own benefit. The Supreme Court of Canada held (at paragraph 43 of <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do</a>) that in and of itself the fact that those employees were acting in breach of instructions is no defence:

“…If the law recognized such a defence, a corporation might absolve itself from criminal consequence by the simple device of adopting and communicating to its staff a general instruction prohibiting illegal conduct and directing conformity at all times with the law. That is not to say that such an element is without relevance when considering corporate liability with reference to offences of strict liability, supra. Where, however, the court is concerned with those mens rea offences which can in law be committed by a corporation, the presence of general or specific instructions prohibiting the conduct in question is irrelevant. The corporation and its directing mind became one and the prohibition directed by the corporation to others is of no effect in law on the determination of criminal liability of either the directing mind or the corporation itself by reason of the actions of the directing mind. This accords with the result reached in other courts.”

HOWEVER, don’t stop reading there. Go on to paragraph 66 of the same judgment to get the full picture:

“Where the criminal act is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee‑manager, the employee‑directing mind, from the outset of the design and execution of the criminal plan, ceases to be a directing mind of the corporation and consequently his acts cannot be attributed to the corporation under the identification doctrine. Thus, the identification doctrine only operates where the Crown demonstrates that the action taken by the directing mind (a) was within the field of operation assigned to him; (b) was not totally in fraud of the corporation; and (c) was by design or result partly for the benefit of the company.”

Please note the following amendments to Canada’s Criminal Code made in 2004:

 

22.1 In respect of an offence that requires the prosecution to prove negligence, an organization is a party to the offence if

(a) acting within the scope of their authority

    (i) one of its representatives is a party to the offence, or

    (ii) two or more of its representatives engage in conduct, whether by act or omission, such that, if it had been the conduct of only one representative, that representative would have been a party to the offence; and

(b) the senior officer who is responsible for the aspect of the organization’s activities that is relevant to the offence departs — or the senior officers, collectively, depart — markedly from the standard of care that, in the circumstances, could reasonably be expected to prevent a representative of the organization from being a party to the offence.

22.2 In respect of an offence that requires the prosecution to prove fault — other than negligence — an organization is a party to the offence if, with the intent at least in part to benefit the organization, one of its senior officers

(a) acting within the scope of their authority, is a party to the offence;

(b) having the mental state required to be a party to the offence and acting within the scope of their authority, directs the work of other representatives of the organization so that they do the act or make the omission specified in the offence; or

(c) knowing that a representative of the organization is or is about to be a party to the offence, does not take all reasonable measures to stop them from being a party to the offence.”

 

The definitions relating to these provisions are:

“organization” means

(a) a public body, body corporate, society, company, firm, partnership, trade union or municipality, or

(b) an association of persons that

          (i) is created for a common purpose,

          (ii) has an operational structure, and

        (iii) holds itself out to the public as an association of persons;

“representative”, in respect of an organization, means a director, partner, employee, member, agent or contractor of the organization;

 

“senior officer” means a representative who plays an important role in the establishment of an organization’s policies or is responsible for managing an important aspect of the organization’s activities and, in the case of a body corporate, includes a director, its chief executive officer and its chief financial officer;”

It is worth nothing that the definition of “senior officers” seems to avoid the difficulty of proving fault at the level of a corporation’s board of directors or directing mind while at the same time avoiding holding the corporation vicariously responsible for the wrongs of every employee or contractor. The bottom line is that it will no longer be necessary for prosecutors to prove fault in the boardrooms or at the highest levels of a corporation - the fault even of middle managers may suffice.

 

TOPIC 4:   Criminal Liability: Non Mens Rea – (Srict/Absolute Liability) - Offences   

Please read pages 239-243 of the Casebook.

Please read the interesting case of R. v. Fitzpatrick’s Fuel Ltd. [2001] N.J. No. 149 (Prov. Ct.) at pages 239-242 of the Casebook.

 

This case involved the sale of beer to a minor who bought six bottles of beer.  The employee who sold the beer was aware of restriction on selling beer to a minor. He followed the required practice of asking for identification and proof of age where any doubt.

The Liquor Control Act created a strict liability offence.  Only proof of actus reus was required (subject only to the company showing it had taken reasonable care, or exercised due diligence, to avoid the commission of the offence).

Actus reus was proven. The ensuing question was whether the actions should be attributed to the corporation, Fitzpatrick’s Fuel Ltd.?

The legal answer to this question involves consideration of “identification” of the corporation with actual persons acting on its behalf.

Handrigan Prov. Ct. J. quotes Justice Estey in Canadian Dredge & Dock Co. v. The Queen:

“The corporation is but a creature of statute, general or special, and none of the provincial corporation statutes and business corporations statutes, or the federal equivalents, contain any discussion of criminal liability or liability in the common law generally by reason of the doctrine of identification. It is a court‑adopted principle put in place for the purpose of including the corporation in the pattern of criminal law in a rational relationship to that of the natural person. The identity doctrine merges the board of directors, the managing director, the superintendent, the manager or anyone else delegated by the board of directors to whom is delegated the governing executive authority of the corporation, and the conduct of any of the merged entities is thereby attributed to the corporation.”  (At paragraph 32 <a href="http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do">http://scc-csc.lexum.com/scc-csc/scc-csc/en/item/59/index.do</a>)

The Crown argued that the employee was a “directing mind” of Fitzpatrick’s Fuel Ltd. and for that reason the identity of corporation merges with the identity of the employee when that employee was performing duties delegated to him “[e]ven though he was no more than an employee of the Company filling the position of gas attendant/cashier...”

Handrigan Prov. Ct. J. suggests, “at first blush, this position suffers from the doubt that it is pushing the concept of “directing mind” too far”. In the end though the learned judge does find it appropriate to go that far and accepts that the charge against the defendant Fitzpatrick’s Fuel Ltd. to be proven beyond a reasonable doubt.

Blog Activity 5.1

Ask yourself whether the decision in R. v. Fitzpatrick’s Fuel Ltd. Is consistent with the decision in the “Rhone” v. The “Peter A.B. Widener”.  If Captain Kelch was not part of the directing mind and will of great lakes towing co. Then how is it that a gas attendant/cashier was a “directing mind” of Fitzpatrick’s Fuel Ltd.? In your view how can the two decisions be reconciled (or can they)?

Please blog your views on this question and your reasons in less than one page under the heading “Fitzpatrick’s Fuel & The Rhone”.

 

Now please read the case of Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch), 2012 BCSC 1851 which can be found here: <a href="http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf">http://www.pssg.gov.bc.ca/lclb/enforcements/pdf/2012/EH11-077A.pdf</a>

 

In this case Beverly Corners Liquor Store Ltd. operated a private retail liquor Sore.  A six-pack of beer was sold to a minor and no identification was requested. The female cashier who sold the liquor to the minor had been fully trained and signed off on all policy and practice manuals; regularly got performance reviews, and was the supervisor on duty on the night in question. She had been found to comply with policy, practices, and systems related to minors. She had been observed to faithfully check on young customers who came to her till. Her failure to follow policies and training on May 11, 2011 was inexplicable.

 

The court noted that:

 

“Supervisors are not part of management. They do not manage or have authority over staff. Their duties are to ensure that the store is cleaned at the end of the night and ready for business the following day. They put the money into the safe and ensure that the store is locked upon leaving. If they have a problem with staff or another issue, they are to call a manager.

 

There is a store manager and a general manager. The store manager reports to the general manager but is responsible to manage staff. Managers do not usually work night shifts unless it is expected to be unusually busy. A manager would not normally be expected to be working on a normal Wednesday night. However, they are available on-call. Managers train employees such as the cashier who sold the liquor to the minor on May 11, 2011. Through policy manuals and training, staff learn to record cancelled sales because of failure to produce identification and to maintain a system of alerts for suspected minors in the store. Employees who are trained by the managers are required to sign off on training and policy manuals.

The general manager is responsible for day to day operations and receives reports from the store and other managers. The general manager is also a shareholder in the business that owns the licensee retail store…”

 

 

There had been no previous compliance issues at Beverly Corners Liquor Store Ltd. In fact management stressed to employees a no tolerance policy when it came to sale of liquor to minors and took pride in being the toughest store on requiring identification in the area.  By all accounts, the policies, manuals, training, procedures, and compliance oversight above standard practice for the industry and went beyond that of most operators. The policies implemented erred on the side of caution for checking identification and there were multiple systems in place to remind staff of their duties in this regard. Staff and management were regularly reminded of their obligations with respect to minors through various means, including in pay envelopes and on buttons worn on their uniforms.

The Liquor Control Branch argued that the cashier was the directing mind of the licensee: “She had the authority to make a determination whether the customer was of legal age and if not satisfied in that regard to refuse the sale.”

Madam Justice Dillon of the Supreme Court of British Columbia considered how to apply the “due diligence” defence (as it pertains to the requirement that the defence prove on a balance of probabilities that the employee was not the directing mind of the licensee Beverly Corners Liquor Store Ltd.)

In the end the learned judge essentially accepted the argument of the defendant Beverly Corners Liquor Store Ltd. that an individual must have sufficient authority in respect of the sphere of relevant operations to be worthy of the appellation - “directing mind”. This in turn required consideration of whom on the premises of Beverly Corners Liquor Store Ltd. “at the time was the directing mind in the establishment as far as supervision was concerned and whether that individual on site at the time took reasonable steps.”

 

It is worth pausing to note that the test set out in The “Rhône” v. The “Peter A.B. Widener” of whether the impugned individual has been delegated governing executive authority of the company within the scope of her or his authority in the design and supervision of the implementation of corporate policy? If the employee merely carries out such policy, then they are not a directing mind of the corporation.

In the end the court in Beverly Corners Liquor Store Ltd. v. British Columbia (Liquor Control and Licensing Branch) made the following observations:

“In this case, the general manager found as a fact that the supervisor was not part of management, did not set store policies, and was not in charge of other employees. Similar to the truck driver/geographical representative in Safety-Kleen, the supervisor did not have any managerial or supervisory function in the sense of governing executive authority. While she did have authority over the performance of the tasks assigned to her, including preventing the sale of liquor to minors, she did not have authority to devise or develop corporate policy or make corporate decisions which went beyond the individual sale in question. The authority to determine whether a customer was of legal age and then to refuse sale, as necessary, was part of the discretion given to exercise responsibility in the performance of her job function. This was an operational matter. It does not establish governing authority for a corporation. While she had discretion and certain responsibility on the night in question to close the Sore and perform individual sales, she was not a directing mind of the licensee as it related to the sale of liquor to minors. As found by the General Manager, she had no authority to design or supervise the implementation of corporate policy. She merely was supposed to carry it out.”

 

Accordingly the decision of the General Manager under the Liquor Control and Licensing Act against Beverly Corners Liquor Store Ltd. was quashed.

Please read the case of Meridian Global Funds Management Asia Limited v. Securities Commission [1995] UKPC 5 which can be found here: <a href="http://www.bailii.org/uk/cases/UKPC/1995/5.html">http://www.bailii.org/uk/cases/UKPC/1995/5.html</a> With the benefit of hindsight this seems a particularly interesting case in the real-life context of the financial scandals that have impacted the world financial system within the last decade.

This case was an appeal to The Judicial Committee of the Privy Council from The Court of Appeal of New Zealand.

The facts were that Mr. Koo, Mr. Ng and others concocted a scheme to gain a 49% controlling interest in a cash rich publicly traded New Zealand company, Euro-National Corporation Ltd. ("ENC") for NZ $18,200,000. Ultimately the purchase was to be financed out of ENC’s assets.

Mr. Koo was Chief Investment Officer of Meridian Global Funds Management Asia Limited (“Meridian”) and Mr. Ng a senior portfolio manager employed by it.  The shares were acquired on November 9, 1990 using Meridian’s funds.  Ultimately, however, the scheme collapsed for reasons that are irrelevant here.

New Zealand legislation required that any person who becomes a substantial security holder in a publicly traded company must give notice of the fact as soon as they know or ought to know that they are a substantial security holder. If this notice is not given, the Securities Commission may apply for a court order to deal with the situation.  The orders available included one to forfeit the shares in question.

The Securities Commission applied for such an order involving forfeiture of the shares.

The New Zealand Court of Appeal found that Meridian knew on November 9, 1990 that they were a substantial security holder of ENC because Mr. Koo’s   knowledge of that fact should be attributed to Meridian.

The Judicial Committee of the Privy Council accepted the following facts. Members of Meridian’s board lived partly in Hong Kong and partly in Australia and met only once a year for formal business. This meeting was in advance of the Meridian annual general meeting. Other matters, which required a board resolution, were circulated by mail. Mr. Koo had been managing director but was replaced by Mr. Armour on the first of August 1990. Although Mr. Koo thereafter in theory reported to Mr. Armour, in the matter of buying and selling securities he continued on in the same way as he had before. The ENC purchases and sales were openly recorded in the books of Meridian but Mr. Koo did not specifically report them to Mr. Armour, who only found out about them after Mr. Koo had left Meridian. Nor did Mr. Koo report anything else, nor was there evidence that Mr. Armour or the other members of the board tried to supervise what Mr. Koo was doing.

Meridian claimed that its “only directing mind and will” was that of its board, or possibly of Mr. Armour, but not Mr. Koo, who after all had been the correctly described by the New Zealand Court of Appeal as "under Mr. Armour" in the corporate hierarchy.

Lord Hoffman’s judgment constitutes a clear review of certain corporate principles and a thoughtful application of those principles. He sets out the following points.

  1. 1. It is a necessary part of corporate personality that there should be rules by which acts are attributed to the company. These may be called "the rules of attribution".
  2. The primary rules of attribution are:
  • Generally to be found in the company’s constitution, typically the articles of association, and will say things such as "for the purpose of appointing members of the board, a majority vote of the shareholders shall be a decision of the company”.
  • Implied by company law, such as "the unanimous decision of all the shareholders in a solvent company about anything which the company under its memorandum of association has power to do shall be the decision of the company":
  • General rules of attribution equally available to natural persons, namely, the principles of agency. The company will appoint servants and agents whose acts, by a combination of the general principles of agency and the company's primary rules of attribution, count as the acts of the company.
  1. And having done so, the company will also make itself subject to the general rules by which liability for the acts of others can be attributed to natural persons, such as estoppel or ostensible authority in contract and vicarious liability in tort.

Lord Hoffman’s conclusions can be found at paragraphs 22 & 23 of the Judgment.

To paraphrase they are that when considering the case of a corporate security holder, the person whose knowledge for this purpose is to count as the knowledge of the company is surely the person who, with the authority of the company, acquired the relevant interest. Otherwise the policy of the Act would be defeated. Companies would be able to allow employees to acquire interests on their behalf that made them substantial security holders but would not have to report them until the board or someone else in senior management got to know about it. This would put a premium on the board paying as little attention as possible to what its investment managers were doing. Their Lordships would therefore hold that upon the true construction of the relevant statutory provision, the company knows that it has become a substantial security holder when that is known to the person who had authority to do the deal. At that point the company is obliged to give the relevant statutory notice that they are a substantial security holder. The fact that Mr. Koo did the deal for a corrupt purpose and did not give such notice because he did not want his employers to find out could not in their Lordships' view affect the attribution of knowledge and the consequent duty to notify. It was therefore not necessary in this case to inquire into whether Koo could have been described in some more general sense as the "directing mind and will" of the company.  

However Lord Hoffman noted that this does not mean that whenever a servant of a company has authority to do an act on its behalf, knowledge of that act will for all purposes be attributed to the company. It is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company. Sometimes . . . it will be appropriate. On the other hand, the fact that a company's employee is authorised to drive a lorry does not in itself lead to the conclusion that if he kills someone by reckless driving, the company will be guilty of manslaughter. There is no inconsistency. Each is an example of an attribution rule for a particular purpose, tailored, as it always must be to the terms and policies of the substantive rule.

Blog Activity 5.2

Would Lord Hoffman’s analysis lead to different conclusions in The “Rhone” v. The “Peter A.B. Widener” or R. v. Fitzpatrick’s Fuel Ltd.? Please blog your views on this question and your reasons in less than one page under the heading “Lord Hoffman In Meridian Global Funds Management Asia Limited v. Securities Commission”.

 

 

 

TOPIC 5: CONTRACTS - AGENTS, OUTSIDERS & CORPORATE LIABILITY

Please read pages 243-277 of the Casebook. Please begin by reading about restrictions in the corporate constitution on the creation of contractual obligations at pages 243-253 of the Casebook.

Ultra vires

Mr. Justice Iacobucci’s judgment in Communities Economic Development Fund v. Canadian Pickles Corp.  [1991] 3 S.C.R. 388 at pages 244-248 of the Casebook is concerned with the common law doctrine of ultra vires. The doctrine of ultra vires is at least in the case of commercial corporations now a historical artifact.  You should read the description of that doctrine for background.

For present purposes, the principal value of the judgment is in the material that appears under the heading “Abolition of the Doctrine of Ultra Vires” on pages 247-248 of the Casebook

In particular please read carefully and think about notes 4 and 5 on page 249 of the Casebook and the section on statutory reform at pages 250-252 of the Casebook.

Also please read carefully sections 13(1) and (2), 17 to 19 and 30 to 33 of the BCBCA, which follow:

“Incorporation

  1. (1) A company is incorporated

(a) on the date and time that the incorporation application applicable to it is filed with the registrar, or

(b) subject to sections 14 and 410, if the incorporation application specifies a date, or a date and time, on which the company is to be incorporated that is later than the date and time on which the incorporation application is filed with the registrar,

(i)  on the specified date and time, or

(ii)  if no time is specified, at the beginning of the specified date.

(2) After a company is incorporated under this Part, the registrar must issue a certificate of incorporation for the company and must record in that certificate the name and incorporation number of the company and the date and time of its incorporation.

Effect of incorporation

  1. On and after the incorporation of a company, the shareholders of the company are, for so long as they remain shareholders of the company, a company with the name set out in the notice of articles, capable of exercising the functions of an incorporated company with the powers and with the liability on the part of the shareholders provided in this Act.

Evidence of incorporation

  1. Whether or not the requirements precedent and incidental to incorporation have been complied with, a notation in the corporate register that a company has been incorporated is conclusive evidence for the purposes of this Act and for all other purposes that the company has been duly incorporated on the date shown and the time, if any, shown in the corporate register.

Effect of notice of articles and articles

  1. (1) Subject to subsection (2), a company and its shareholders are bound by the company's articles and notice of articles in the manner contemplated by subsection (3) from the time at which the company is recognized.

(2) A pre-existing company and its shareholders are bound, in the manner contemplated by subsection (3),

(a) by the company's notice of articles, if any,

(b) by the company's articles, and

(c) subject to section 373 (3) or 439 (3), as the case may be, by the company's memorandum.

(3) A company and its shareholders are bound by the company's articles and notice of articles or by its memorandum and articles, as the case may be, and by any alterations made to those records under this Act or a former Companies Act, to the same extent as if those records

(a) had been signed and sealed by the company and by each shareholder, and

(b) contained covenants on the part of each shareholder and the shareholder's successors and personal or other legal representatives to observe the articles and notice of articles or memorandum and articles, as the case may be

Capacity and powers of company

  1. A company has the capacity and the rights, powers and privileges of an individual of full capacity.

Joint tenancy in property

  1. (1) Every corporation is capable of acquiring and holding property, rights and interests in joint tenancy in the same manner as an individual, and, if a corporation and one or more individuals or other corporations become entitled to property, rights or interests under circumstances or by virtue of an instrument that would, if the corporation had been an individual, have created a joint tenancy, they are entitled to the property, rights or interests as joint tenants.

(2) Despite subsection (1), acquiring and holding property, rights or interests by a corporation in joint tenancy is subject to the same conditions and restrictions as attach to acquiring and holding property, rights or interests by a corporation in severalty.

(3) On the dissolution of a corporation that is a joint tenant of property, rights or interests, the property, rights or interests devolve on the other joint tenant.

Extraterritorial capacity

  1. Unless restricted by its charter or by an Act, each British Columbia corporation has the capacity

(a) to carry on its business, conduct its affairs and exercise its powers in any jurisdiction outside British Columbia, and

(b) to accept from any lawful authority outside British Columbia powers and rights concerning the corporation's business and powers.

Restricted businesses and powers

  1. (1) A company must not

(a) carry on any business or exercise any power that it is restricted by its memorandum or articles from carrying on or exercising, or

(b) exercise any of its powers in a manner inconsistent with those restrictions in its memorandum or articles.

(2) No act of a company, including a transfer of property, rights or interests to or by the company, is invalid merely because the act contravenes subsection (1).”

 

Blog Activity 5.3

Please read section 33(1) & section 33(2) carefully (preferably several times). In your view what is the effect of a breach of section 33 (1)? Please blog your views on this question and your reasons in less than one page under the heading “Section 33 – Say What? ”

 

Please read pages 254-277 of the Casebook dealing with contracting through corporate agents. There is a helpful introductory note at the top of page 254 of the Casebook:

“At the beginning of the 20th century, corporations were arguably a protected species . . . However by the mid 20th century – doctrines relating to ostensible authority changed matters. In the 21S century what some might argue is a form of discrimination against corporate principals and favouring interested groups outside traditional corporate boundaries have further evolved issues relating to agents, outsiders and corporate liability for contracts.”

Please read and note the discussion of “Actual Authority at Common Law” at pages 254-255 of the Casebook.

Now please read the “Ostensible Authority” case of SCHWARTZ v. MARITIME LIFE ASSURANCE CO., [1997] N.J. No. 77, 149 Nfld. & P.E.I.R. 234 (C.A.) at pages 256-268 of the Casebook. We will go into some detail in analyzing this decision as it contains fulsome arguments on both sides of the “Ostensible Authority” coin (not to mention discussion of “Actual Authority” principles as well. The full version of this intriguing and complicated of case can be found at <a href="http://caselaw.canada.globe24h.com/0/0/newfoundland-and-labrador/supreme-court-of-newfoundland-and-labrador-court-of-appeal/1997/04/10/schwartz-v-maritime-life-assurance-co-1997-14706-nl-ca.shtml">http://caselaw.canada.globe24h.com/0/0/newfoundland-and-labrador/supreme-court-of-newfoundland-and-labrador-court-of-appeal/1997/04/10/schwartz-v-maritime-life-assurance-co-1997-14706-nl-ca.shtml</a>

The facts were that in 1971 the Maritime Life Assurance Co. and George Rideout & Associates Limited entered into a 'General Agency Agreement'. Mr. Rideout was the principal shareholder of George Rideout & Associates.  Under the General Agency Agreement, George Rideout & Associates became a general agent and George Rideout a sub-agent. George Rideout & Associates was given the right to solicit insurance business on behalf of Maritime Life Assurance Co. but had no right to bind or commit Maritime Life Assurance Co. in any way to any person. Maritime Life Assurance Co.  could accept or reject any application for an insurance policy or contract submitted by George Rideout or by George Rideout & Associates.  George Rideout was free to do business with other companies as well.

The initial investment, which was the subject of the case, was made by Mr. Harold Schwartz with the Maritime Life Assurance Co., through George Rideout and/or George Rideout & Associates Limited. It was a form of annuity insurance policy. In January 1984 George Rideout and the Mr. Schwartz met to discuss the further investment of monies that Mr. Schwartz had on short term investment in a bank. Because an interest rate of 11% could be obtained, it was agreed between them that Mr. Schwartz would invest $100,000 as an add-on to the policy in question. Mr. Schwartz instructed Mr. Rideout that the investment was to be made immediately. He then provided Mr. Rideout with a cheque for $100,000, payable to George Rideout & Associates Limited. That cheque was deposited to the credit of George Rideout & Associates Limited at its bank in Corner Brook, Newfoundland. A receipt was issued by George Rideout & Associates Limited dated January 31, 1984.

Other facts included that Mr. Schwartz knew that Mr. Rideout could not issue a policy, and that any policies had to be issued by the Maritime Life Assurance Co. Of note is that as a result of business relationship between Mr. Schwartz and George Rideout & Associates, Maritime Life Assurance Co. had issued nine policies to Mr. Schwartz and his company.

Mr. Schwartz waited for the policy in respect of the $100,oo and in spring 1984 he asked Mr. Rideout about it. Mr. Rideout said he would have to look into the matter. In late summer 1984 Mr. Schwartz asked again and was given essentially the same answer.

In late October 1984 Mr. Rideout telephoned Mr. Schwartz and advised he had received the relevant policy from the Maritime Life Assurance Co. but that there was an error in it so he had sent it back for correction. Mr. Rideout also sent a letter to Mr. Schwartz to the same effect enclosing a copy of the purported policy with a policy number.

In January 1985 Mr. Rideout delivered to Mr. Schwartz a document purportedly issued by Maritime Life Assurance Co. acknowledging receipt of $111,000, signed by “D. Pellerine, Policy Administrator". The top was dated January 10, 1985, but the bottom was dated February 25, 1985. There were in fact discrepancies in both the dates and policy numbers but Mr. Schwartz did not notice.

In summer or early fall of 1986 Mr. Schwartz asked his auditors to write to the Maritime Life Assurance Co. to ascertain the status of his investments. The Maritime Life Assurance Co. responded to Mr. Schwartz’s accountants, confirming certain information but saying that the 100K had not been received from Rideout.

It turned out that Mr. Schwartz had provided Rideout with $100,000 for investment that Rideout misappropriated.  Schwarz sued Maritime Life Assurance Co. contending that Rideout was the agent of Maritime Life Assurance Co. for the purpose of receiving monies for investment. The trial judge found that Mr. Rideout had no authority, actual or ostensible, to bind the Maritime Life Assurance Co.

Mr. Schwartz was not aware of the restrictions on Mr. Rideout and George Rideout & Associates in the Agency Agreement between George Rideout & Associates and Maritime Life Assurance Co. On the other hand the trial judge found no evidence that Mr. Rideout had held himself out to be an exclusive agent of the Maritime Life Assurance Co. or that the Maritime Life Assurance Co. held him out as its agent. The judge found that by giving Mr. Rideout $100,000 with the authority to invest that money for him, Mr. Schwartz put Mr. Rideout in a position to bind him in an investment contract but George Rideout had no authority to bind the Maritime Life Assurance Co.

The issue before the Newfoundland Court of Appeal was whether George Rideout was an agent or representative of the Maritime Life Assurance Co. when he received the $100,000 from Mr. Schwartz?

The majority decision was delivered by Gushue, C.J.N. The Court’s observations on the law of agency are particularly important:

“However, an agency may also arise by operation of law without any contract, express or implied, having been entered into. Thus, where a person who by his or her words or conduct has allowed another to appear to the outside world to be his agent, with the result that third parties deal with him in this capacity, that person cannot thereafter repudiate this apparent agency if, by doing so, injury would be caused to those third parties. In other words, the principle of estoppel would apply. As stated by Fridman,

"...the agent's authority in agency by estoppel is not an actual or real authority at all. That is to say it does not result from consent on the part of the principal, whether express, or implied according to the rules already discussed, that the agent should have any authority at all, or the kind of authority which he has purported to exercise. The agent's authority here is the product of the principal's conduct, his representation that the agent is authorized to act on his behalf. It is an authority which 'apparently' exists having regard to the conduct of the parties. In fact it does not exist. But as a matter of law, arising out of the factual position, the agent is said to have authority."

The court observed that the relationship between Rideout and the Maritime Life Assurance Co. throughout the full course of their dealings with each other did not permit Rideout to enter into contracts of life insurance on behalf of the Maritime Life Assurance Co. He was entitled to solicit life insurance business from third parties and to that extent, but to that extent only, he was an “agent” of the Maritime Life Assurance Co. Rideout was not granted by the Maritime Life Assurance Co. the authority to enter into any insurance contracts on behalf of the Maritime Life Assurance Co., any such contracts taking legal effect only after approval by the Maritime Life Assurance Co. itself.

No express authority was ever granted by the Maritime Life Assurance Co. to Rideout to bind the Maritime Life Assurance Co. Thus, Mr. Schwartz must establish that the Maritime Life Assurance Co. has done something that would allow him, or lead him, to believe that Rideout did indeed have the authority to bind the Maritime Life Assurance Co. by Rideout’s actions and, further, that there was reliance on such belief by Mr. Schwartz, to his detriment.

So the question becomes did Rideout in any way hold himself out to Mr. Schwartz as being authorized to enter into a legal relationship with Mr. Schwartz on behalf of the Maritime Life Assurance Co.? The simple answer is that, with one exception, there was no evidence that Rideout had done so. As found by the trial judge, Rideout operated almost exclusively as an investment broker. In his judgment, the judge details the relevant evidence in this regard, as follows:

“Rideout did not advertise himself or his company as agents of the defendant. What is more important, Maritime did not advertise or in any other way hold out Rideout or his company as its agent.”

In each case policies were issued by the Maritime Life Assurance Co.  and forwarded directly to Mr. Schwartz. Mr. Schwartz acknowledged in his testimony that he knew that the policies themselves were to be issued by Maritime Life Assurance Co. In Mr. Justice Gushue’s view, this arrangement could not convey to Mr. Schwartz that Rideout had any authority to bind Maritime Life Assurance Co.

The court went on to cite Freeman and Lockyer (A Firm) v. Buckhurst Park Properties (Mangal), [1964] 1 All E.R. 630 (C.A.), Pearson, L.J., said:

"An 'apparent' or 'ostensible' authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted on by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the 'apparent' authority, so as to render the principal liable to perform any obligations imposed on him by such contract. The representation, when acted on by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.

"In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the "actual" authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent's actual authority is. All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either on the representation of the principal, i.e., apparent authority, or on the representation of the agent, i.e., warranty of authority. The representation which creates 'apparent' authority may take a variety of forms of which the commonest is representation by conduct, i.e., by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has normally 'actual' authority to enter into."

(Emphasis added.)

 

Based on all of the foregoing Gushue, C.J.N. then marshalled facts and logic that perhaps will come as a surprise:

“If one speculates as to what the legal position would have been as between the appellant and the respondent had Rideout misappropriated the funds in 1979 or 1980, rather than in 1984, the ready answer seems to me to be that the respondent would have been responsible to the appellant for those funds. The respondent had appointed Rideout as its Regional Superintendent for Atlantic Canada and had provided him with company stationary which indicated that the regional office for Atlantic Canada was at P.O. Box 387, Corner Brook, Newfoundland. Unquestionably, it must have been intended by the respondent that Rideout utilize this stationary in the sense of communicating with persons in Atlantic Canada having dealings with Rideout as "agent" of Maritime Life. Whatever the contract as between Rideout and the respondent might have been, this letterhead and the designation of Rideout as Regional Superintendent must be deemed to have been intended by the respondent to be communicated to members of the general public - including the appellant. Thus, not only did Rideout hold himself out as representing the respondent, but further the respondent must be taken to have agreed that he do so. It could not be expected that members of the public, and in particular for our purposes the appellant, would be aware that Rideout did not hold the authority to bind the respondent. In my view, in light of the above receipt, Rideout would be held to have accepted the $110,000 on behalf of, and as if he were, the respondent. In any subsequent legal proceeding, the appellant would have been found entitled to recover the money from the respondent.

The next question is what, if anything, changed between 1978 and 1984 which would alter the above situation? While the appellant held only a receipt from Rideout for the $100,000 paid in 1984, he was, subsequent to 1978, legitimately of the belief that Rideout was the respondent's legal representative. He did not expect the issuance of any new policy. There is absolutely no evidence of anything occurring in that time frame as between Rideout and the appellant or as between the respondent and the appellant which would or should have disabused the appellant of that conviction. He was never informed that Rideout was no longer employed by the respondent, nor that he was no longer its Regional Superintendent or, indeed, with respect to the entering into contracts, that Rideout was now merely an agent for the purpose of soliciting applications for life insurance and no more. Indeed, the appellant stated in evidence that, as far as he was concerned, Rideout was still in the same position with the respondent in 1984 that he had been in 1978. In my considered view, the respondent would have been estopped in 1979 from denying that Rideout had the legal authority to bind it and, in the absence of any actual or imputed knowledge on the part of the appellant that Rideout's position vis-a-vis the respondent had changed, the respondent is equally estopped from denying that Rideout had such apparent or ostensible authority in 1984.”

Mr. Schwartz was therefore entitled to recover the monies paid over to Mr. Rideout in 1984.

Marshall, J.A. dissented coming to the opposite conclusion. In the following paragraphs an attempt will be made to distill Marshall. J.A.’s reasoning to some extent.

The learned Justice noted that Mr. Schwartz claimed that the responsibility of the Maritime Life Assurance Co. arose because it had cloaked Rideout with authority to act as it’s agent. The policy of the Maritime Life Assurance Co. was that throughout the relationship, Rideout was always regarded as "an independent franchise dealer", as distinguished from a career agent who was "tied to one company". In this vein, Rideout is described as always making "quite a point of positioning himself as being an independent".

There was one period, however, when Rideout was not only operating as owner of a company general agency, but also as an employee of the Maritime Life Assurance Co. That was a fifteen-month period between January of 1978 and March of the following year. During that time Rideout held the title of Regional Superintendent for the Atlantic Provinces. His general duties in that capacity were to appoint, train and supervise agents; to conserve business; and, to further the company's interests in Atlantic Canada. It was in this context that Rideout was provided with letterheads of the Maritime Life Assurance Co. with his name and capacity emblazoned on them. That aspect of their relationship was terminated some fifteen months later by mutual consent, as there was a joint feeling that it was not working out very well.

The $100,000 that Mr. Schwartz paid to George Rideout & Associates that was intended for investment with the Maritime Life Assurance Co., never reached the insurance company. The funds never arrived at their destination, having been stolen by Rideout. This case attempts to resolve, as between the Maritime Life Assurance Co. and Mr. Schwartz, which of the two innocent parties must bear the loss occasioned by Rideout's dishonesty.

 In any event, Mr. Schwartz agreed to make the investment. He must be taken to have known that one of that magnitude was contingent on Maritime's acceptance as under the terms of the annuity plan, to which the $100,000 was destined as an additional premium, Maritime had reserved the right to refuse any additions exceeding $50,000. He, himself, also placed two conditions on the deposit of the money by Rideout with the company, viz.: that it be accepted for a one year term at the 11% rate which Rideout had quoted as being available.

In the spring of 1984, not having received a reply, Mr. Schwartz telephoned Rideout asking for the whereabouts of Maritime's acknowledgement of his investment. Mr. Schwartz was given assurances there was no problem with the policy. This was followed by other communications between the two men when finally, in January 1985, the unscrupulous Rideout delivered to Mr. Schwartz a document purporting to be Maritime's acknowledgment of the additional deposit to the annuity plan, but which subsequently turned out to be a forgery.”

 

Marshall, J.A. then turned to the impugned decision where the trial judge dismissed Mr. Schwartz’s claim suggesting the trial judge was influenced by the facts that Rideout and his company were not held out as the agent of the Maritime Life Assurance Co., either by Rideout himself or by the Maritime Life Assurance Co. Thus, after noting that their agreement, while enabling the placing of business with the Maritime Life Assurance Co., did not restrict Rideout from transacting business with others, the trial judge finds: “Rideout and his company operated an investment counselling service, offering many types of investments and other financial services to clients but he did not advertise himself or his company as agents of the defendant. What is more important, the defendant did not advertise or in any way hold out Rideout or his company as its agent."

 

Moreover, the trial judge made another key finding of fact regarding Mr. Schwartz's knowledge of the extent of the relationship of Rideout and the Maritime Life Assurance Co.: "Rideout could not issue a policy. The plaintiff knew that. There was no evidence to suggest that Rideout purported to have authority to issue policies."

Returning to the actual words of Marshall, J.A.:

 

“At this stage of the judgment, therefore, the judge is indicating that his appraisal of the evidence led him to conclude that Rideout outwardly conducted his business as an independent operation; it was treated by Maritime as such; and, Mr. Schwartz knew Rideout had no authority to issue a policy. These three findings are key to the decision's outcome.

Next, adverting to the evidence reflecting the importance of independence to Rideout, and the absence of evidence of his being held out as an agent by Maritime, the judge answers the question posed in the foregoing passage by holding that Rideout:

"...might be better described as a broker who acted in that manner in investing the plaintiff's money with the defendant. Granted, the plaintiff regarded Rideout and his company as agents of the defendant and he was justified in doing that, but that did not make Rideout or his company the defendant's agents. On the contrary, if Rideout and his company were the agents of anybody, it was of the plaintiff."

Then, the judge explains why Rideout could not be considered the agent of Maritime with respect to the transaction involving the stolen money. With the agency agreement explicitly prohibiting Rideout from binding Maritime, he reasons there was no actual authority. Thus, there would be no basis for argument that he was explicitly empowered to accept the money in return for the desired annuity commitment. Neither could ostensible authority be imputed to Rideout because, the judge holds, there were no representations by Maritime that he was invested with authority. To the contrary, the judge states that in giving Rideout "$100,000 with the authority to invest that money for him", Mr. Schwartz put him in a position to bind him in an investment contract. Hence, as he reasoned in the foregoing passage, if Rideout was anyone's agent, it was of Mr. Schwartz, not Maritime. With Maritime not being Rideout's principal in the transaction, Mr. Schwartz's claim to recover his loss from the insurance company was dismissed.”

 

Regarding the approach to appeal Marshall, J.A. in his dissent observed that there was ample evidence to support the trial judge’s finding that Rideout, through his company, was a salesman and as such agent of the Maritime Life Assurance Co. for the purpose of soliciting business on its behalf, but without any authority to bind the Maritime Life Assurance Co. contractually to customers. There was equally proof supporting the trial judge’s conclusion that Rideout was Mr. Schwartz's investment counsellor who purchased and placed investments on his behalf with the Maritime Life Assurance Co. over a period of time.

MacGillivray and Parkington's text On Insurance Law, 8th ed., Sweet & Maxwell makes the following commentary at p. 420, para. 419 was quoted as follows: "It must not be assumed that an agent of the insurers necessarily acts on their behalf for the whole of the time while he is working on insurance business. An agent employed to solicit proposals is not ordinarily the insurers' agent to fill up the proposed form, and, if he does so, he becomes the agent of the assured for that purpose."

 

This recognition of Rideout's dual agency role lies at the crux of the case under appeal. Marshall, J.A. felt it important to underscore that the trial judge found Rideout to be an agent of both the Maritime Life Assurance Co.  and of Mr. Schwartz.  The existence of this dual agency is what renders it imperative to determine whose agent Rideout was when he accepted and held the $100,000 inasmuch as the answer to who should bear the loss of Rideout's criminal duplicity hinges upon whose behalf he was holding the money, i.e. who was Rideout’s principal at the time of the theft.

Marshall, J.A. felt that the trial judge nonetheless found in effect that in the circumstances, Rideout was Mr. Schwartz's agent at the time of loss. The judge clearly regarded that, in giving the funds to Rideout with authority to invest them on stipulated terms, Mr. Schwartz constituted his investment counsellor as his agent to apply for the additional investment on the terms he was seeking from the Maritime Life Assurance Co. Hence Mr. Schwartz should not be able to recover a loss occasioned by his own agent's dishonesty.

Marshall J.A. then turned to the question of Rideout's “Actual Authority”.

He observes that Mr. Schwartz takes the position that the actual authority conferred by the Maritime Life Assurance Co. on Rideout to receive moneys on its behalf constituted him its agent for that purpose and was sufficient to ground its liability for the stolen money. Thus, Mr. Schwartz argues that apart altogether from ostensible authority, Rideout's actual authority from the Maritime Life Assurance Co. entitled Mr. Schwartz to recover his loss on the basis that the theft was not Mr. Schwartz’s problem since the money became part of the Maritime Life Assurance Co.'s funds on its payment to Rideout as the insurance company's designated agent.

Marshall J.A. observed that this argument overlooks that the Maritime Life Assurance Co.'s agency delegation to Rideout was to act as its salesperson. It is true, as Mr. Schwartz's counsel pointed out, that as such the agreements authorized applications and money to be received on the Maritime Life Assurance Co.'s behalf. However, that must be construed as related to the mandate conferred to solicit business. The judge's factual finding, however, was that the money in the circumstances of this case was received, not as salesman for the Maritime Life Assurance Co., but as agent for Mr. Schwartz incidental to his placing Rideout "in a position to bind him in an investment contract", i.e. as his representative.

Each of the arguments alleging Rideout had actual authority to receive the stolen money as agent for Mr. Schwartz relied upon Rideout to negotiate the terms of the investment and placed the money with him as Mr. Schwartz’s agent to negotiate the deal. It follows therefore according to Marshall, J.A., that the agency between Mr. Schwartz and Rideout was operative and that Rideout necessarily had to be holding the money on Mr. Schwartz's behalf pending the negotiation of the investment in accordance with his explicit instructions.

In contrast, as already noted, the agreements expressly stipulated that Rideout had no authority to bind the Maritime Life Assurance Co. Likewise, the annuity plan explicitly reserved the right to refuse additional premiums of the magnitude Mr. Schwartz was offering and did not bind itself to accept the terms he was seeking. As a result, it is clear that Rideout had no express authority that would allow him to affect the Maritime Life Assurance Co.'s legal position, but did have such power insofar as Mr. Schwartz was concerned.

Accordingly Mr. Schwartz gave Rideout authority to enter into a binding agreement, while the Maritime Life Assurance Co. had not empowered him to bind it. Therefore, when the money was turned over to Rideout, it must be understood to have been held by him on Mr. Schwartz's behalf pending Rideout obtaining the investment on the prescribed terms. At the time of the theft, there was no contract relating to the money with the Maritime Life Assurance Co. and the insurance company could lay no claim to entitlement to it. By contrast Mr. Schwartz could have claimed the right to its return, at least up until acceptance of his conditions by the Maritime Life Assurance Co. As Mr. Schwartz’s offer to the Maritime Life Assurance Co. through his agent Rideout was never accepted, it not having been communicated, he could have demanded at any time return of the money by simply withdrawing the offer made through his intermediary.

Marshall, J.A. reasoned that being  the principal of Rideout at the time of the theft, it follows that, as between himself and the Maritime Life Assurance Co., Mr. Schwartz should bear the loss resulting from his own agent's criminal act.

Marshall J.A. then turned to the question of Rideout's “Ostensible Authority”.

The trial judge went on to hold that Mr. Schwartz "cannot rely on any suggestion that Rideout had ostensible authority as an agent" of the Maritime Life Assurance Co. That is because a third party may only be influenced by representations made by the alleged principal. As the trial judge stated: "In the present case, neither Rideout nor his company was vested with the authority to issue policies on behalf of the defendant and the defendant did not place either of them in a position where it could be held responsible for the acts or defaults of Rideout or his company.

The legal foundation for ostensible authority must rest on reliance by the third party on representations of the principal. Then the trial judge goes on to find in effect that the Maritime Life Assurance Co. had done nothing to warrant any such reliance by Mr. Schwartz because the Maritime Life Assurance Co. had placed neither Rideout nor his company in a position to issue policies and Mr. Schwartz ought to have known this.

Thus Marshall, J.A. felt that the evidence affords ample support for the judge's findings of irregularities in Rideout's conduct of his business dealings that should have put Mr. Schwartz on alert. This in the dissenting Justice’s itself was sufficient to preclude any reliance on ostensible authority.

In Marshall, J.A.’s own words:

“These statements encapsulate in a nutshell the response to the attempt to hold Maritime liable on the basis of Rideout's ostensible authority. If a third party does not deal with the intermediary as agent of the principal, an agency relationship cannot be deemed to have any causal connection with the third party's complaint against the intermediary's actions. Moreover, there cannot have been any causal connection if the third party did not believe the putative agent had authority, despite the appearance of authority. There was clearly no belief in this case by Mr. Schwartz in Rideout's authority from Maritime as he engaged him to negotiate on his behalf. Thus, there was no causal connection between any holding out of Rideout by Maritime as its agent and Mr. Schwartz's dealing with him. Accordingly, he cannot hold Maritime liable for his loss.

Counsel for Mr. Schwartz is nonetheless arguing the judgment should be reversed because the judge erred in his rejection of Rideout's ostensible authority from Maritime. He bases his contention on the fact that Rideout was actually an employee around the time when the original annuity policy was issued. He points out that Rideout had been then given the title of Atlantic Regional Superintendent of Maritime and furnished with letterhead, on one of which he issued to Mr. Schwartz a receipt dated March 20, 1978, for the original $110,000 that ultimately was followed with delivery to Mr. Schwartz of the annuity policy. Laying stress on the receipt having been typed on Maritime's letterhead, counsel argues this represented a holding out by Maritime of Rideout as the insurance agent with authority to accept an add-on to the existing policy. In this vein, counsel points out there was no attempt on termination of Rideout's status as Regional Superintendent to make known that he no longer held that post, with the result that it was reasonable for Mr. Schwartz to assume no change in his ostensible authority as reflected in the 1978 receipt, when Mr. Schwartz paid the $100,000 to him as an additional premium on the policy.

This argument overlooks that the judge, in effect, found there was no more reliance upon the former employee status of Rideout than there was on his position as its salesman in the instant transaction in which the loss was sustained. It essentially fails to come to grip with the law's holding, whatever the ostensible authority, that no liability can be ascribed, to borrow from the foregoing passage from Bowstead and Reynolds, in the absence of "causal connection between the representation" and consequential loss and the dealing with the alleged agent. It also reflects once more the weakness recurring throughout this whole appeal of counsel's ignoring of Rideout's dual agency role and likewise evades the reality that the relevant inquiry in this appeal is which function Rideout was fulfilling when receiving the money and for which principal he was holding it.

In any event, the argument that Mr. Schwartz assumed Rideout was an employee of Maritime as a result of his awareness of his Regional Superintendent post in 1978 rests on somewhat shaky ground. The evidence shows that post was vacated in the first quarter of 1979, and in the five years between then and the payment of the stolen money Mr. Schwartz had had constant contact with Rideout. During that time, he too, would have had a chance to observe what the judge found to be the situation, viz: that Rideout was taking pains to hold himself out as an independent broker. This would tend to detract from any claim he was relying on Rideout as an employee of Maritime in 1984, and from support that he was by then treating him as his own investment counsellor.

The 1978 receipt makes no less tenuous the claim of reliance on Rideout's employee status in 1984. This is because in the six year interval, as the judge found and the evidence supports, Rideout was outwardly conducting his business as an independent operation; Maritime was not holding him out as its agent; and, more importantly, Mr. Schwartz knew Rideout had no authority to issue a policy and was relying on Rideout to place his investments.

Nevertheless, despite the slender ground upon which rests the claim that Mr. Schwartz was operating under the impression that Rideout was Atlantic Regional Superintendent in 1984, the judgment arguably leaves scope to infer that the judge, whether as a result of the 1978 receipt or Mr. Schwartz's long time dealings, might have accepted Mr. Schwartz was operating under such an impression in 1984. This possibility arises out of his noting that in 1984 Mr. Schwartz "still regarded Rideout as the defendant's Regional Superintendent for the Atlantic Region". He does not go on to say whether he accepts such an impression as reasonable. This is logically attributable to it being irrelevant to his decision since there could be no causal connection arising from any relationship between Maritime and Rideout in view of the central holding that Mr. Schwartz was dealing with Rideout and his company in the transaction involving the deposit of the subsequently missing money. In such circumstances, it clearly mattered not what capacity Mr. Schwartz may have assumed Rideout to hold with Maritime by reason of a receipt given six years earlier, or otherwise. It not having been demonstrated that the judge erred in his appreciation of those circumstances, the treatment as irrelevant of any vestige of ostensible authority flowing out of Rideout's actions as Regional Superintendent is quite understandable.

In this case the judge reviewed all of the facts and concluded that "(t)he course of conduct between the plaintiff and Rideout suggests that Rideout was acting as investment counsellor, not necessarily as an agent of the defendant". That Mr. Schwartz had made a substantial investment through Rideout with another company supports this holding as does the judge's overview of the facts which indicated that Mr. Schwartz treated Rideout as his independent investment broker whom he trusted and to whom "he left the matter of his investments". The judge found that Mr. Schwartz placed no reliance upon whatever ostensible authority with which Maritime might have cloaked Rideout. With no reasonable basis to believe Rideout was empowered to issue annuity commitments for Maritime, Mr. Schwartz could not possibly found his claim to recovery through an agency relationship between Maritime and Rideout on the latter's apparent or ostensible authority.

Having found no basis to the claims of error on the judge's part in failing to allow recovery of the stolen money on the footing of agency based on either actual or ostensible authority, this discussion will now turn to the final challenge mounted by Mr. Schwartz i.e. Maritime's negligence.”

Marshall, J.A.’s “Summary and Conclusion” in dissent was:

“There was ample evidence supporting the trial judge's finding that Mr. Schwartz did not provide the $100,000 stolen by Rideout to him in his capacity as a representative of Maritime. To the contrary, he provided the funds to Rideout as his agent with explicit instructions to invest them with Maritime on terms and conditions which he knew Rideout had no authority to accept for the insurance company. He knew they would require acceptance by Maritime. Until so accepted, the money belonged to Mr. Schwartz. Since it was his money that was stolen, he must bear its loss and cannot look to Maritime to assume responsibility for money remitted to his own agent to negotiate an investment for him. Moreover, Maritime owed no duty of care to Mr. Schwartz to exercise supervision and control over these funds which he had elected to give to his investment broker whom he engaged on his own behalf.

In summary, it is well to reiterate that this is a case of an insurance broker who exercised a dual agency role. The trial judge fully recognized this and concluded from his analysis of "the events and circumstances" in this case that the intermediary was acting as broker of Mr. Schwartz to invest the money on his behalf. He made no error of law in arriving at this conclusion. Counsel for Mr. Schwartz has mounted his claim of error by stressing the agency relationship established by Maritime to solicit business on its behalf. The judgment shows that relationship was fully appreciated but decides that in the circumstances that the stolen money was given to the broker in his capacity as representative of Mr. Schwartz in the parallel.

To now accept the contrary view put forth by Mr. Schwartz's counsel and hold the money was delivered to Rideout in his role as Maritime's agent would require this court to substitute its view of the facts for that of the trial judge. This cannot be done in the absence of overriding and palpable error in the judge's appreciation of the evidence. A review of the transcript not only shows no such misapprehension, but it reveals the judge had ample evidence upon which to found his decision. Therefore, the disposition is beyond the purview of appellate review.

Accordingly, this appeal should be dismissed with costs and the judge upheld in his holding that, as between the two innocent parties involved in this appeal, Mr. Schwartz should suffer "the unhappy consequences" of the embezzlement. It was he who had the misfortune to select a thief as his agent in placing the investment and, as a result in all the circumstances obtaining, ought to absorb the loss.”

 

UNIT WRAP UP:

We have established that corporations are by legal means ascribed characteristics of independence that can be proscribed, or result in binding action and attendant consequences. Accordingly we now turn to the mechanics of how the corporate “being” actually operates and governs itself.

 

ASSIGNMENT #1

 

It is the present day. You are a young corporate lawyer at the well know British Columbia law firm Wie, Haight, Raye & Darr whose primary practice is maritime insurance litigation. In fact you are the only one in the firm with any knowledge of corporate law. One of the senior partners Sonny Raye comes to your office  (proving this is all fictional because he would never come to your office) and says:

“We have just been retained by the giant worldwide conglomerate Hexxon Oil & Gas because their oil tanker the Hexxon Valdez struck a reef in Prince William Sound, Alaska this morning at 12:04 a.m. local time. Our information is that the ship was carrying approximately 55 million gallons of oil of which approximately 11 million gallons (approximately 250,000 barrels) are going to be spilled into Prince William Sound over the next few days.

It gets worse. The Master of the Hexxon Valdez Captain Joe Hazelwode was widely reported to have been drinking heavily last night and was asleep in his bunk when the ship hit the reef. The third mate was at the helm. You might think he would not have hit the reef if only he had looked at the ships radar. Except that the radar wasn’t even turned on. Our client has told us that they have known for the past year that the Hexxon Valdez’s radar has been broken and disabled. It was in our client’s view just too expensive to fix and have operational.

Our client Hexxon’s full name is the “Hexxon Trading Corporation” and it was originally chartered on May 2, 1670 in London, England but became a Canadian company in 1965 and is currently a Company under the Canada Business Corporations Act (R.S.C., 1985, c. C-44).

The ship “Hexxon Valdez” was registered in the country of Liberia. It is owned by “Valdez Ltd.” a Liberian Corporation.

The shares of “Valdez Ltd.” are held in equal proportion (50% interest each) by two entities. The first is a limited liability partnership known as the “666 Limited Liability Partnership”. The Managing Director of “666 Limited Liability Partnership” is ”Hexxon Experts Inc.”, a 100% owned subsidiary of “Hexxon Trading Corporation”. The partners of the “666 Limited Liability Partnership” are four international investment firms and the “Hexxon Trading Corporation” in equal proportions (20% interest each).  The other 50% shareholder in “Valdez Ltd.” is “Hexxon Trading Corporation B.C. Inc.”, a B.C. Company incorporated pursuant to the Business Corporations Act [SBC 2002] Chapter 57. “Hexxon Trading Corporation B.C. Inc.” is a wholly owned subsidiary of “Hexxon Trading Corporation”.  The Board of Directors of “Valdez Ltd.” is comprised of 6 Directors, 3 appointed by the “666 Limited Liability Partnership” and 3 appointed by “Hexxon Trading Corporation B.C. Inc.”. The Directors appointed by “666 Limited Liability Partnership” are all “independent directors” having no connections to Hexxon, its subsidiaries or affiliates. The three directors appointed by “Hexxon Trading Corporation B.C. Inc.” are comprised of the CEO of the “Hexxon Trading Corporation”, the VP Finance of the “Hexxon Trading Corporation” and one “independent director” having no connection to Hexxon, its subsidiaries or affiliates. “Valdez Ltd.” has never made a profit, but before the accident “Valdez Ltd.” was projected to become profitable in fiscal 2015.

There is one further fact. Captain Hazelwode is an independent contractor, not an employee of Valdez Inc. He is the sole shareholder and sole director of “Hazelwode Captainry Ltd.”, another Liberian company.

Our client Hexxon knows that it is going to be sued in British Columbia for negligence by individuals and businesses who have been disrupted by the spill including the Alaskan seafood industry, property owners and environmental groups. We are expecting approximately 38,000 plaintiffs. Hexxon’s overall strategy is to blame Captain Hazelwode as much as possible.

The firm and our client would like your preliminary assessment of what corporate law defenses we might have. We know that you are not very experienced in the area so all we really need is a point form list of questions and observations regarding the corporate law principles that might apply to provide us with some defenses based on corporate structure, and/or deny us those defenses.

If you think that there may be further facts that it would be either helpful or important to know, indicate briefly what they are. As well, please try and limit your memo to no more than five pages (one and half spacing).”