DATE: 20041201

DOCKET: C41261

COURT OF APPEAL FOR ONTARIO

BORINS, LANG and JURIANSZ JJ.A.

B E T W E E N :

CANADIAN-AUTOMATIC DATA PROCESSING SERVICES LTD.

Jonathan F. Lancaster and Nicole D. Samson for the appellant

Plaintiff (Appellant)

• and -

Brian G. Morgan and McLean Wood as amicus curiae

CEEI SAFETY & SECURITY INC. and CYNTHIA IRVINE

No one appearing Defendants (Respondent) for the respondent

Heard: September 9, 2004

On appeal from the order of Justice James D. Carnwath of the Superior Court of Justice dated January 23, 2004.

BORINS J.A.:

I

[1] This is an appeal by Canadian-Automatic Data Processing Services Ltd. (“ADP”) from the dismissal of its motion for default judgment against the respondent, Cynthia Irvine, who at the relevant time was a director of CEEI Safety & Security Inc. (“CEEI”). Pursuant to a contract between ADP and CEEI, ADP was to pay the wages of CEEI’s employees when requested by CEEI, and CEEI was to provide ADP in advance with sufficient funds to make the payroll payment. On August 16, 2002, at CEEI’s request, ADP made a payroll payment before it had been placed in funds by CEEI. ADP was unaware that it had not been placed in sufficient funds at the time the payment was made. Subsequently, ADP’s requests for reimbursement were ignored by CEEI.

[2] An action brought by ADP against CEEI and Ms. Irvine to recover the amount of the payroll went undefended. ADP’s claim against CEEI was for damages for breach of contract. Under rule 19.04(1)(a) of The Rules of Civil Procedure, ADP signed default judgment against CEEI. Executions against CEEI were returned unsatisfied. Consequently, ADP moved under rule 19.05 for default judgment against Ms. Irvine.

[3] ADP based its claim against Ms. Irvine on the doctrine of unjust enrichment. It claimed that as a director of CEEI she was directly liable to its employees for unpaid wages under s. 131 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”) and that ADP’s payment of the payroll discharged this liability. According to ADP, because it had paid the wages of CEEI’s employees, thereby relieving Ms. Irvine of her statutory liability to do so, she had been unjustly enriched. ADP claimed that because Ms. Irvine had been unjustly enriched, it was entitled to obtain restitution from her. In the alternative, ADP claimed to be subrogated to the employees’ rights against Ms. Irvine under s. 131 of the OBCA.

[4] For reasons reported at [2004] O.J. No. 440, Carnwath J. dismissed ADP’s motion for default judgment. It is from this judgment that ADP has appealed. For the reasons that follow, I would dismiss the appeal. As significant issues are raised by the appeal which is unopposed as a result of Ms. Irvine’s default, the court appointed Mr. Brian G. Morgan as amicus curiae to act in this appeal.

II

[5] Pursuant to ADP’s standard form agreement (the “Payroll Agreement”), CEEI contracted with ADP to provide certain payroll services, including the administration of CEEI’s payroll at its request, using funds to be provided in advance by CEEI. The Payroll Agreement had a section called “Payroll Funding Method” that provided a number of methods that ADP could have selected to ensure that CEEI provided it with sufficient funds two days before the wages of CEEI’s employees were to be paid. The method selected by ADP was a prefunded direct debit to ADP’s bank account which, by its own admission, did not enable it to verify with its own bank that the payment had been received from CEEI before it paid CEEI’s payroll. Other methods that ADP could have selected included the requirements that CEEI pay by prefunded certified cheque or prefunded wire transfer.

[6] Ms. Irvine was a director of CEEI at the time ADP paid the wages of CEEI’s employees. CEEI’s direction to ADP to pay the payroll was given at Ms. Irvine’s instruction and under her authority at a time when she knew, or should have been aware, that CEEI lacked sufficient funds to cover the payroll.

[7] In breach of the payroll agreement, CEEI failed to provide ADP with sufficient funds to cover the payroll. CEEI did not inform ADP of its failure to do so. As a result of a problem with its own bank, ADP was unable to obtain verification from it that sufficient funds had been received before the time it was required to pay CEEI’s payroll. Consequently, ADP paid the payroll in the belief that sufficient funds to cover it had been provided by CEEI. Had it been aware that funds had not been provided, ADP would not have paid the employees’ wages as it is not a lender, but a payroll provider. Subsequently, ADP wrote to CEEI demanding that it be reimbursed, but no payment was made. In addition, as a result of CEEI’s default, ADP terminated the Payroll Agreement.

[8] In its statement of claim, in reliance on s. 131 of the OBCA, ADP pleads that “Irvine is liable to the employees of CEEI for all debts not exceeding six months’ wages that became payable for services performed by the employees of CEEI”. It claims that as the payroll payment that it paid to CEEI’s employees was for services that they performed for the corporation, it discharged Ms. Irvine’s obligation under s. 131, with the result that ADP “is subrogated to the rights of such employees [under s. 131] against Irvine”.

[9] The relevant provisions of s. 131 of the OBCA in force at the time ADP commenced its action against CEEI and Ms. Irvine read as follows:

131(1)The directors of a corporation are jointly and severally liable to the employees of the corporation for all debts not exceeding six months’ wages that become payable while they are directors for services performed for the corporation and for the vacation pay accrued while they are directors for not more than twelve months under the Employment Standards Act, and the regulations thereunder, or under any collective agreement made by the corporation.

(2) A director is liable under subsection (1) only if,

(a) the director is sued while he or she is a director or within six months after ceasing to be a director; and

(b) the action against the director is commenced within six months after the debts became payable, and

(i) the corporation is sued in the action against the director and execution against the corporation is returned unsatisfied in whole or in part, or ….[^1]

(3) Where execution referred to in clause (2)(b) has issued, the amount recoverable from a director is the amount remaining unsatisfied after execution.

(4) Where a director pays a debt under subsection (1) that is proved in liquidation and dissolution or bankruptcy proceedings, the director is entitled to any preference that the employee would have been entitled to, and where a judgment has been obtained the director is entitled to an assignment of the judgment.

(5) A director who has satisfied a claim under this section is entitled to contribution from the other directors who were liable for the claim.

III

[10] I come now to the motion judge’s reasons for dismissing ADP’s motion for default judgment against Ms. Irvine. He found that as ADP chose to pay the employees’ wages before its bank had verified receipt of the funds from CEEI, CEEI was “unjustly enriched” by ADP’s payment. However, CEEI’s employees were not “unjustly enriched” because under their employment contract they were entitled to be paid their wages when due.

[11] On the basis of these findings, at para. 8, the motion judge disagreed with ADP’s contention that it was subrogated to the rights of CEEI’s employees against Ms. Irvine under s. 131 of the OBCA:

Having been paid, no right of action accrued to the employees under s. 131 of the Business Corporations Act. There were no debts that became payable for services performed for the corporation. At best, the employees had an inchoate right which was extinguished on payment for the services performed. In the vernacular, there are no shoes for the plaintiff to step into.

[12] The motion judge then considered ADP’s claim that Ms. Irvine had been unjustly enriched because she received a benefit when ADP paid the employees’ wages, thereby discharging her obligation to pay the wages under s. 131 of the OBCA. Applying the reasoning of MacPherson J. in Toronto-Dominion Bank v. Bank of Montreal (1995), 1995 7159 (ON SC), 22 O.R. (3d) 362 (Gen. Div.), the motion judge held that Ms. Irvine did not receive a sufficient benefit to satisfy the requirements for a claim for unjust enrichment by ADP.

[13] The Toronto-Dominion Bank (“TD”) case concerned a claim for unjust enrichment where it had mistakenly made a payment to the account of a company, Carpita, at another bank, the Bank of Montreal. That payment was placed in a trust account specifically for the payment of the wages of Carpita’s employees. When Carpita went bankrupt, TD sued the Bank of Montreal and Carpita’s directors for restitution on the ground of unjust enrichment. TD claimed that the directors had received a benefit sufficient for a claim based on unjust enrichment because without the payment there might not have been sufficient money to pay Carpita’s employees, with the result that its directors would have been liable to pay the employees’ wages under s. 131 of the OBCA. MacPherson J., at p. 375, gave the following reasons that were quoted and applied by the motion judge at para. 12 of his reasons:

I do not agree with this argument. In a recent case, Peel (Regional Municipality) v. Canada, 1992 21 (SCC), [1992] 3 S.C.R. 762, 98 D.L.R. (4th) 140, McLachlin J., for a unanimous court, discussed in some detail the concept of benefit in the context of juristic reason, the third component of the test for unjust enrichment. She reviewed many cases and the two leading texts, R. Goff and G. Jones, The Law of Restitution, 3rd ed. (London: Sweet & Maxwell, 1986), and P.D. Maddaugh and J.D. McCamus, The Law of Restitution (Aurora: Canada Law Book, 1990), and concluded that a claim for unjust enrichment can succeed only if, inter alia, the benefit received by the person enriched is “incontrovertible” or “demonstrable” or “unquestionable” (p. 797).

None of these words comes anywhere close to describing the benefit that TD alleges the directors of Carpita received in this case. No employee ever made a claim under s. 131 of the Ontario Business Corporations Act. Nor did any of the directors receive one penny of the money in the trust fund. Accordingly, the directors received no direct benefit. As for indirect benefit, it was remote and speculative in 1990 and it disappeared entirely when no one initiated the s. 131 process. In short, the situation in this case is, in my view, completely divorced from any realistic notion of “incontrovertible” benefit.

IV

[14] As I have stated, ADP claims against Ms. Irvine on the basis of unjust enrichment. If unjust enrichment is found, ADP claims that the appropriate remedy is either (a) restitution of the amount ADP paid towards the wages of CEEI’s employees, or (b) alternatively, subrogation to the employees’ rights against Ms. Irvine under s. 131 of the OBCA. These remedial alternatives are reached only if the elements of the test for unjust enrichment are made out. Put somewhat differently, if any element of the test cannot be established by ADP, its claim against Ms. Irvine must fail.

[15] The legal test for unjust enrichment in Canada is well established, although somewhat refined recently by the Supreme Court of Canada in Garland v. Consumers’ Gas Co., 2004 SCC 25, [2004] 1 S.C.R. 629. To obtain restitution based on unjust enrichment, a plaintiff must establish: (1) an enrichment of the defendant by the receipt of a benefit; (2) a corresponding deprivation of the plaintiff; and (3) an absence of a juristic reason for the enrichment.

[16] It is ADP’s position that Ms. Irvine was enriched as a result of the benefit she received when it paid the wages of CEEI’s employees, thereby relieving her of her statutory responsibility under s. 131 of the OBCA. As I have explained, if ADP’s position that Ms. Irvine received a benefit is wrong, its claim against Ms. Irvine necessarily must fail. In my view, ADP’s position is wrong. To explain why, it is helpful to consider the purpose of s. 131 of the OBCA and the conditions that must be satisfied before an employee of a corporation can obtain a remedy against its directors when the corporation has failed to pay the employee’s wages.

[17] Broadly speaking, s. 131 of the OBCA is in the nature of employee protection legislation. The primary purpose of legislation of that nature, which is found in the corporate legislation of the federal government and that of most provinces, is to protect employees in the event of bankruptcy or insolvency of their corporate employers: Barrette v. Crabtree Estate, 1993 127 (SCC), [1993] 1 S.C.R. 1027 at para. 26. As this court noted in Zavitz v. Brock (1974), 1974 839 (ON CA), 3 O.R. (2d) 583 at 588, the first legislation protecting employees whose wages were unpaid, by imposing a limited liability on a corporation’s directors to pay the wages, was s. 52 of the Ontario Joint Stock Companies Letters Patent Act, 1874, S.O. 1874, c. 35. In Barrette, the Supreme Court of Canada traced the counterpart of the Ontario legislation now found in s. 119 of the Canada Business Corporations Act R.S.C. 1985, c. C-44, to a New York state law dating from 1848 and to s. 49 of the Canada Joint Stock Companies Letters Patent Act, 1869, S.C. 1869, c. 13. Referring to s. 131 of the OBCA, in Proulx v. Sahelian Goldfields Inc. (2001), 2001 6255 (ON CA), 55 O.R. (3d) 775 at para. 11, this court observed: “As such, it is an exception to the principle that normally directors are not liable for the debts of a corporation absent an express statutory provision imposing such liability on them.”

[18] In Barrette, in discussing the purpose of legislation similar to s. 131 of the OBCA, L’Heureux–Dubé J. made reference to a number of authorities. She concluded the discussion with the following reference at para. 29:

Iacobucci, Pilkington and Prichard similarly justify the protection at issue here by the special vulnerability of employees as compared with other creditors of the corporation:

This liability is an intrusion on the principle of corporate personality and limited liability, but it can be justified on the grounds that directors who authorize or acquiesce in the continued employment of workers when the corporation is not in a position to pay them should not be able to shift the loss onto the shoulders of the employees. Other creditors who supply goods and services to a failing corporation are not entitled to this kind of preference, but neither are they as dependent on the corporation as employees, nor as vulnerable.

(Canadian Business Corporations (1977), at p. 327.)

[19] Therefore, as with corporate statutes in most other Canadian jurisdictions, s. 131 sets out a legislative framework that enables employees to pursue claims for unpaid wages, not exceeding six months’ wages, against the directors of corporate employers. Although s. 131(1) speaks of directors being liable to employees for certain debts payable to a corporation’s employees while the directors hold office, the directors are not primarily liable for these debts. The preconditions to a director’s liability in s. 131(2) and (3) make it clear that the primary liability for debts to the employees rests with the corporation. Specifically, at the time that the payroll was paid by ADP, as a condition precedent to the liability of a director, the employee must sue the employer corporation within a specific period of time, and execution against the corporation must be returned at least partially unsatisfied.[^2] The amount that can be recovered from the director is the amount remaining unsatisfied after execution.

[20] Two conclusions follow from the foregoing discussion. First, without s. 131 of the OBCA, an employee would have no remedy against the director of a corporation that has failed to pay his or her wages. Second, a director’s liability to an employee for unpaid wages is secondary to that of his or her corporate employer.

[21] As I have explained, the liability of directors under s. 131 of the OBCA to pay unpaid wages arises only when such wages are in fact unpaid. This liability arises only when the corporation has defaulted on its primary contractual obligation as an employer to pay its employees’ wages. In this case, when ADP followed CEEI’s direction to pay its employees, ADP was fulfilling the obligation of CEEI, and not an obligation of its director, Ms. Irvine. As CEEI had paid its employees through the agency of ADP, its obligation to its employees had been fulfilled. As the employees were paid, they had no claim under s. 131 against Ms. Irvine or any other director, with the result that Ms. Irvine’s statutory obligation did not, and could not, arise. It follows that Ms. Irvine received no benefit as she was not enriched when ADP discharged CEEI’s existing obligation to its employees.

[22] The fact that it was an obligation of the company that was fulfilled by ADP’s payment, not an obligation of Ms. Irvine, is what the motion judge referred to when he stated that “CEEI was unjustly enriched by the plaintiff’s payment,” while holding that Ms. Irvine was not. It was, therefore, CEEI that received the direct benefit of the payment made by ADP, and not Ms. Irvine. Any benefit that she received was a secondary collateral benefit, incidental to that of CEEI. Under the principles set out in Peel, supra, as quoted by MacPherson J. in Toronto-Dominion, supra, and applied by the motion judge, such benefit is incapable of supporting a claim for unjust enrichment.

[23] Having reached the conclusion that Ms. Irvine was not unjustly enriched as a result of ADP’s payment of CEEI’s payroll, there is no need to consider ADP’s alternative position that by subrogation ADP may assert the employees’ claims for unpaid wages against Ms. Irvine under s. 131 of the OBCA. However, as I have explained in the context of my unjust enrichment analysis, factually, ADP did not pay a debt owed by Ms. Irvine to CEEI’s employees, or for that matter to CEEI. Consequently, as subrogation simply means substitution of one person for another, ADP cannot stand in the shoes of CEEI or its employees as neither have any rights to assert against Ms. Irvine. Moreover, recovery against Ms. Irvine should be denied because it would be contrary to public policy considerations, as ADP is attempting to use s. 131 of the OBCA, a statutory employee protection provision, as a creditor protection provision. In this case, ADP elected to do business in a manner that prevented it from being able to verify that funds were received from CEEI before it made payment, despite having alternative methods available that would have allowed it to better protect itself. Section 131 offers employees protection in recognition that they do not have available to them the same means of protection available to other creditors.

[24] In support of my conclusion, I would refer to Canadian-Automobile Data Processing Services v. Bentley (2004), 2004 BCCA 408, 242 D.L.R. (4th) 250 (B.C.C.A.), a case that deals with very similar issues to those in this case. The plaintiff in Bentley is the same company as in this case. It advanced the same claim against a director of another company for which it had made payroll payments without first receiving sufficient funds. ADP’s claim was based on the same ground as its claim in this case: that the payments had relieved the director of his potential statutory liability to employees for unpaid wages under s. 96 of the Employment Standards Act, R.S.B.C. 1996, c. 113, and therefore ADP was entitled to payment from the director based on his unjust enrichment. The majority of the court rejected this on the ground that there was no incontrovertible benefit to the director as required by Peel, supra, and also because recovery by ADP would not be within the reasonable expectations of the parties and would be contrary to public policy considerations, and therefore should be denied under the juristic reason analysis in Garland, supra.

[25] In his juristic reason analysis, Mackenzie J.A. quoted extensively from Garland, supra. In particular, he focused on Iacobucci J.’s discussion of the factors to be considered where a defendant chooses to rebut a prima facie case of the absence of juristic reasons to retain a benefit. He referred to Iacobucci J.’s view, in para. 46 of Garland, that as part of the defendant’s attempt to rebut, courts should have regard to the reasonable expectation of the parties and to public policy considerations. After finding that it was not within the reasonable expectation of ADP and Bentley that ADP would look to a director’s statutory obligation in the relevant legislation, Mackenzie J.A. went on to discuss public policy considerations. In reasons that apply equally to this case, Mackenzie J.A. stated at paras. 72-73:

In my view, policy provides an even stronger reason to deny ADP's claim than the parties' reasonable expectations. The general rule is that corporate officers are not liable for the corporation's debts. The separate legal personality of a corporation and its sole liability for its debts are fundamental to our economic system. The liability of directors and officers for unpaid wages is a statutory exception to the general rule, intended for the protection of employees, not other creditors. . . . To extend liability beyond the statutory scheme to other creditors erodes the general rule of corporate responsibility, for the benefit of commercial enterprises undertaking known business risks rather than the vulnerable group of employees the legislation was intended to protect. If ADP's claim is allowed, the exception will be extended to third parties funding wage payments in the ordinary course of their business. The scheme of the Employment Standards Act does not go that far, and any extension must rest on equitable principles. In my view, the statutory provisions reflect the legislative recognition of a unique vulnerability of employees. Sophisticated enterprises taking commercial risks, such as ADP, are not in the same category.

ADP's loss was a foreseeable commercial risk, recognized in the contract. The contract required Syntecor [the employer] to pre-fund the payroll two days before payment and ADP's failure to secure that pre-funding contributed to its loss.

V

[26] For all of the above reasons, I agree with decision of the motion judge and I would dismiss the appeal. Normally, the successful party would be entitled to costs of the appeal. However, as amicus curiae, Mr. Morgan is not asking for costs. The court wishes to thank Mr. Morgan and counsel for the appellant for their assistance.

RELEASED: December 2, 2004 (“SB”)

“S. Borins J.A.”

“I agree Susan Lang J.A.”

“I agree R. G. Juriansz J.A.”

[^1]: Subsection (2) was repealed and the following substituted by S.O. 2002, c. 24, Sch. B, s. 27(1), proclaimed in force January 1, 2004:

(2) A director is liable under subsection (1) only if,

(a) the corporation is sued in the action against the director and execution against the corporation is returned unsatisfied in whole or in part; or

(b) before or after the action is commenced, the corporation goes into liquidation, is ordered to be wound up or makes an authorized assignment under the Bankruptcy and Insolvency Act (Canada), or a receiving order under that Act is made against it, and, in any such case, the claim for the debt has been proved.

[^2]: As pointed out in fn.1, the conditions precedent to the liability of a director were changed on January 1, 2004.