Ontario Psychological Association v. Mardonet et al. Mardon et v. Ontario Psychological Association et al.

[Indexed as: Ontario Psychological Assn. v. Mardonet]

Ontario Reports Ontario Superior Court of Justice, Lederer J. July 15, 2016 132 O.R. (3d) 750 | 2016 ONSC 4528

Case Summary

Corporations — Officers and directors — Liability — Corporation suing employee for misappropriation of funds — Employee counterclaiming against officers and directors of corporation for contribution and indemnity on basis that they failed to supervise her — Claim struck — Officers and directors owing no duty of care or fiduciary duty to employee to protect employee from her own wrongdoing.

The OPA, a not-for-profit company, sued its former employee M for damages for misappropriating more than $1.6 million in the course of her employment. M counterclaimed against the OPA and its officers and directors for wrongful dismissal. She also claimed against the officers and directors for contribution and indemnity based on their failure to supervise her. The individual defendants by counterclaim brought a motion for an order striking out the paragraphs of the statement of defence and counterclaim which asserted the claim for contribution and indemnity, submitting that those paragraphs disclosed no reasonable cause of action.

Held, the motion should be granted.

It was plain and obvious that the officers and directors of a company owe no duty of care or fiduciary duty to an employee of the company to protect the employee from her own wrongdoing.

Anns v. Merton London Borough Council, [1978] A.C. 728, [1977] 2 All E.R. 492, [1977] 2 W.L.R. 1024, 75 L.G.R. 555, 141 J.P. 527, 5 Build. L.R. 1, 4 I.L.R. 21, 243 E.G. 523 (H.L.); Cooper v. Hobart, [2001] 3 S.C.R. 537, [2001] S.C.J. No. 76, 2001 SCC 79, 206 D.L.R. (4th) 193, 277 N.R. 113, [2002] 1 W.W.R. 221, J.E. 2001-2153, 160 B.C.A.C. 268, 96 B.C.L.R. (3d) 36, 8 C.C.L.T. (3d) 26, REJB 2001-26862, 110 A.C.W.S. (3d) 943, apld

Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64, 2004 SCC 68, 244 D.L.R. (4th) 564, 326 N.R. 267, J.E. 2004-2016, 49 B.L.R. (3d) 165, 4 C.B.R. (5th) 215, REJB 2004-72160, 134 A.C.W.S. (3d) 548, consd

Other cases referred to

BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, 52 B.L.R. (4th) 1, EYB 2008-151755, J.E. 2009-43, 301 D.L.R. (4th) 80, 71 C.P.R. (4th) 303, 383 N.R. 119, 172 A.C.W.S. (3d) 915; Bluefoot Ventures Inc. v. Ticketmaster (c.o.b. Citysearch), 2007 ONSC 55363, [2007] O.J. No. 4916, 288 D.L.R. (4th) 191, 41 B.L.R. (4th) 256, 162 A.C.W.S. (3d) 1014 (S.C.J.); Canada v. Saskatchewan Wheat Pool, 1983 SCC 21, [1983] 1 S.C.R. 205, [1983] S.C.J. No. 14, 143 D.L.R. (3d) 9, 45 N.R. 425, [1983] 3 W.W.R. 97, 23 C.C.L.T. 121, 18 A.C.W.S. (2d) 133; Canada (Attorney General) v. Inuit Tapirisat of Canada, 1980 SCC 21, [1980] 2 S.C.R. 735, [1980] S.C.J. No. 99, 115 D.L.R. (3d) 1, 33 N.R. 304, 5 A.C.W.S. (2d) 255; Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 SCC 105, [1992] 1 S.C.R. 1021, [1992] S.C.J. No. 40, 91 D.L.R. (4th) 289, 137 N.R. 241, 11 C.C.L.T. (2d) 1, [1992] I.L.R. para. 93-348, 33 A.C.W.S. (3d) 357, 1992 CarswellNat 168; [page751] Caparo Industries plc v. Dickman, [1990] 2 A.C. 605, [1990] 1 All E.R. 568, [1990] 2 W.L.R. 358, [1990] B.C.L.C. 273 (H.L.); Density Group Ltd. v. HK Hotels LLC, 2014 ONCA 605, [2014] O.J. No. 3865, 2 E.T.R. (4th) 73, 324 O.A.C. 292, 244 A.C.W.S. (3d) 169; Dumont v. Canada (Attorney General), 1990 SCC 131, [1990] 1 S.C.R. 279, [1990] S.C.J. No. 17, 67 D.L.R. (4th) 159, 105 N.R. 228, [1990] 4 W.W.R. 127, 65 Man. R. (2d) 182, [1990] 2 C.N.L.R. 19, 19 A.C.W.S. (3d) 1300; Festival Hall Developments Ltd. v. Wilkings, 2009 ONSC 29489, [2009] O.J. No. 2400, 57 B.L.R. (4th) 210 (S.C.J.); Hercules Managements Ltd. v. Ernst & Young, 1997 SCC 345, [1997] 2 S.C.R. 165, [1997] S.C.J. No. 51, 146 D.L.R. (4th) 577, 211 N.R. 352, [1997] 8 W.W.R. 80, J.E. 97-1151, 115 Man. R. (2d) 241, 31 B.L.R. (2d) 147, 35 C.C.L.T. (2d) 115, 71 A.C.W.S. (3d) 169; Hodgkinson v. Simms, 1994 SCC 70, [1994] 3 S.C.R. 377, [1994] S.C.J. No. 84, 117 D.L.R. (4th) 161, 171 N.R. 245, [1994] 9 W.W.R. 609, J.E. 94-1560, 49 B.C.A.C. 1, 97 B.C.L.R. (2d) 1, 16 B.L.R. (2d) 1, 6 C.C.L.S. 1, 22 C.C.L.T. (2d) 1, 57 C.P.R. (3d) 1, 95 D.T.C. 5135, 5 E.T.R. (2d) 1, 50 A.C.W.S. (3d) 469, varg, [1992] B.C.J. No. 556, [1992] 4 W.W.R. 330, 11 B.C.A.C. 248, 65 B.C.L.R. (2d) 264, 5 B.L.R. (2d) 236, 6 C.P.C. (3d) 141, 45 E.T.R. 270, 32 A.C.W.S. (3d) 316 (C.A.), varg, [1989] B.C.J. No. 979, 43 B.L.R. 122, 15 A.C.W.S. (3d) 449 (S.C.); Hospital Products Ltd v. United States Surgical Corp. (1984), 55 A.L.R. 417 (H.C.); Hunt v. Carey Canada Inc., 1990 SCC 90, [1990] 2 S.C.R. 959, [1990] S.C.J. No. 93, 74 D.L.R. (4th) 321, 117 N.R. 321, [1990] 6 W.W.R. 385, J.E. 90-1436, 49 B.C.L.R. (2d) 273, 4 C.C.L.T. (2d) 1, 43 C.P.C. (2d) 105, 23 A.C.W.S. (3d) 101; Kamloops (City) v. Nielsen, 1984 SCC 21, [1984] 2 S.C.R. 2, [1984] S.C.J. No. 29, 10 D.L.R. (4th) 641, 54 N.R. 1, [1984] 5 W.W.R. 1, J.E. 84-603, 66 B.C.L.R. 273, 11 Admin. L.R. 1, 29 C.C.L.T. 97, 8 C.L.R. 1, 26 M.P.L.R. 81, 26 A.C.W.S. (2d) 453; Murphy v. Brentwood District Council, [1991] 1 A.C. 398, [1990] 2 All E.R. 908, [1990] 3 W.L.R. 414, 89 L.G.R. 24, [1990] 2 Lloyd's Rep. 467, 22 HLR 502 (H.L.); Nash v. Ontario (1995), 27 O.R. (3d) 1, 1995 ONCA 2934, [1995] O.J. No. 4043, 59 A.C.W.S. (3d) 1083 (C.A.); Odhavji Estate v. Woodhouse, [2003] 3 S.C.R. 263, [2003] S.C.J. No. 74, 2003 SCC 69, 233 D.L.R. (4th) 193, 312 N.R. 305, J.E. 2004-47, 180 O.A.C. 201, 11 Admin. L.R. (4th) 45, 19 C.C.L.T. (3d) 163, 127 A.C.W.S. (3d) 178; R. v. Imperial Tobacco Canada Ltd., [2011] 3 S.C.R. 45, [2011] S.C.J. No. 42, 2011 SCC 42, 308 B.C.A.C. 1, 419 N.R. 1, 2011EXP-2380, J.E. 2011-1326, 335 D.L.R. (4th) 513, 21 B.C.L.R. (5th) 215, 25 Admin. L.R. (5th) 1, 86 C.C.L.T. (3d) 1, [2011] 11 W.W.R. 215, 83 C.B.R. (5th) 169, 205 A.C.W.S. (3d) 92; ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 26 O.R. (3d) 481, [1995] O.J. No. 3556, 1995 ONCA 1301, 129 D.L.R. (4th) 711, 87 O.A.C. 129, 23 B.L.R. (2d) 165, 9 C.C.L.S. 97, 59 A.C.W.S. (3d) 213 (C.A.); Syl Apps Secure Treatment Centre v. D. (B.), [2007] 3 S.C.R. 83, [2007] S.C.J. No. 38, 2007 SCC 38, 284 D.L.R. (4th) 682, 365 N.R. 302, J.E. 2007-1512, 227 O.A.C. 161, 49 C.C.L.T. (3d) 1, 39 R.F.L. (6th) 245, EYB 2007-122390, 159 A.C.W.S. (3d) 464; Teck Corp. Ltd. v. Millar, 33 D.L.R. (3d) 288, [1973] 2 W.W.R. 385, 1972 BCSC 950 (S.C.); Williams v. Ontario (2009), 95 O.R. (3d) 401, [2009] O.J. No. 1819, 2009 ONCA 378, 310 D.L.R. (4th) 710, 70 C.P.C. (6th) 213, 249 O.A.C. 150, 57 M.P.L.R. (4th) 164, 66 C.C.L.T. (3d) 193, 177 A.C.W.S. (3d) 560

Statutes referred to

Business Corporations Act, R.S.O. 1990, c. B.16 [as am.], s. 134(1) [as am.], (b) Canada Business Corporations Act, R.S.C. 1985, c. C-44 [as am.], s. 122(1), (b)

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 21.01(1)(b)

Authorities referred to

Fleming, John G., "The Negligent Auditor and Shareholders" (1990), 106 L.Q. Rev. 349 [page752] McGuinness, Kevin Patrick, The Law and Practice of Canadian Business Corporations (Toronto: Butterworths, 1999) McHugh, M.H., Neighbourhood, Proximity and Reliance, in P.D. Finn, ed., Essays on Torts (1989), 5--42 Parfitt, Clea, and Melinda Munro, "Whose Interests Are We Talking About: A.(C.) v. Critchley and Developments In the Law of Fiduciary Duty" (1999), 33 U.B.C. L. Rev. 199

MOTION to strike paragraphs of a statement of defence and counterclaim.

Paul Stern, for plaintiff by counterclaim. Simon Clements, for defendants to the counterclaim.

LEDERER J. : —

Introduction

[1] This is a motion brought by the defendants to a counterclaim. They seek to strike out certain paragraphs of the statement of defence and counterclaim of the defendant Charlotte (Carla) Mardonet. The four paragraphs are part of her counterclaim. It is submitted that these paragraphs disclose no reasonable cause of action.

[2] The motion is brought pursuant to rule 21.01(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194:

21.01(1) A party may move before a judge,

(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence,

and the judge may make an order or grant judgment accordingly.

[3] On such a motion, there can be no evidence. The facts alleged in the statement of claim (in this case, the counterclaim) are, for the purpose of the motion, to be accepted as true unless they are patently ridiculous or incapable of proof. 1

[4] It is well known and accepted that, for such a motion to succeed, it must be plain and obvious that the pleading discloses no reasonable cause of action. Put another way, the moving parties must show that the claim has no reasonable prospect of success. If there is a chance the plaintiff might succeed, notwithstanding the claim may be weak or the proposition novel, it should be left for determination following a hearing of the [page753] evidence at trial. 2 This has been summarized by the Supreme Court of Canada in the following quotation:

This Court has reiterated the test on many occasions. A claim will only be struck if it is plain and obvious, assuming the facts pleaded to be true, that the pleading discloses no reasonable cause of action . . . Another way of putting the test is that the claim has no reasonable prospect of success. Where a reasonable prospect of success exists, the matter should be allowed to proceed to trial. 3

[Citations omitted]

Background

[5] The plaintiff, Ontario Psychological Association, is a not-for-profit company. It is a voluntary organization. Its object is to advance the practice and science of psychology through public and professional advocacy and education for the benefit of its members and the communities they serve. The defendant Charlotte (Carla) Mardonet was employed by the plaintiff. She was hired "in or around 1990". 4 She "assumed and undertook, inter alia, the role of managing the affairs of the [plaintiff] and the day-to-day administration of the finances and money of the [plaintiff]". 5 The statement of claim states that "[f]rom 2003 (or earlier) through and including 2013, Carla abused her role with the [plaintiff] and engaged in a scheme to misappropriate in excess of 1.6 million dollars or more . . .". 6 Three of the other defendants were related to or associated with Carla. They are Sarah Esaafi (Carla's daughter), Gabriel Bensusan (Carla's husband) and 2181420 Ontario Inc. (a corporation of which Carla, her daughter and husband were the controlling minds and principles). The defendant Vern E. Penner was the plaintiff's auditor. The defendant BDO Canada LLP is in the business of [page754] providing accounting, tax and advisory services and is responsible for the actions and omissions of the defendant Vern E. Penner. The last of the defendants, Dr. John Service, was the executive director of the plaintiff.

[6] In short, the action alleges that Charlotte (Carla) Mardonet misappropriated the funds and converted them to her own benefit and the benefit of her family members and friends. She and her daughter and husband are said to have conspired together to defraud the plaintiff and cause it significant harm. The defendant Vern E. Penner and the defendant Dr. John Service failed to identify, follow-up on, investigate and disclose to the plaintiff and its board of directors the misappropriation of funds. It is said that the frequency and circumstances of the transactions which were the substance and demonstration of the misappropriation should have raised "red flags and constituted badges of fraud and error" 7 which ought to have been and may have been detected by the defendants Vern E. Penner and Dr. John Service.

[7] In her statement of defence, Charlotte (Carla) Mardonet either denies or claims a lack of knowledge of the various and many allegations made against her. She denies any and all liability. The statement of defence includes a cross-claim against the defendants Vern E. Penner, BDO Canada LLP and Dr. John Service. The cross-claim seeks "[f]ull indemnity or alternatively contribution, in the event and to the extent that [Charlotte (Carla) Mardonet] is found in any way liable to the [plaintiff], for any and all amounts found due by her to the [plaintiff]". 8 This pleading alleges that the defendants by cross-claim owed Charlotte (Carla) Mardonet both a duty of care and a fiduciary duty which they breached as a result of their failure to provide her with the supervision, management, support and guidance that was part of their responsibility.

[8] As will be apparent from the introduction to these reasons, this was not the end of the pleadings. There is also a counterclaim. Each of the individuals who are defendants by counterclaim are introduced to the action by this pleading. None of them would otherwise be a party. The counterclaim includes two causes of action. Against five of the defendants by counterclaim (Ontario Psychological Association (the plaintiff), Janet Kasperski, Ryan Morley, Connie Kushnir and Jane Storrie), Charlotte (Carla) Mardonet claims for wrongful dismissal. Against all of the [page755] defendants by counterclaim, save for plaintiff (the Ontario Psychological Association), she makes the same claim for "indemnity and contribution" made against the defendants to the cross-claim. The defendants by counterclaim who are individuals are or were officers and directors of the plaintiff. In the counterclaim, the claim for "Full indemnification" appears to arise from the collective failure of these individuals to supervise her through their individual responsibilities as officers and their involvement with the board of directors, its committees and the accountants of the plaintiff.

[9] Both the cross-claim and the counterclaim seek damages in the amount of $24 million "as claimed by the [Ontario Psychological Association]". 9 I confess it is not clear to me how this amount is arrived at. The statement of claim claims for various tranches, each in the value of $5 million. Some of them are clearly repetitive or redundant. They are the same claim made in respect of different defendants or different causes of action. There is a claim for punitive damages also in the amount of $5 million and special damages in the amount of $3 million. How this adds up to $24 million is not readily apparent to me. For the purposes of this motion, it is not important or relevant.

[10] By this motion, the defendants by counterclaim seek to strike out the counterclaim insofar as it claims for indemnity and contribution. It is acknowledged that the claim for wrongful dismissal must stand. It is not the subject of this pleadings motion. The motion seeks to strike out only four paragraphs of the statement of defence and counterclaim. As in the case of the allegations made in the cross-claim, these paragraphs reflect the idea that each of the defendants by counterclaim owed either or both a duty of care and a fiduciary duty to Charlotte (Carla) Mardonet. The impugned paragraphs are as follows:

79. The Plaintiff by Counterclaim claims:

A. As against each of the Defendants by Counterclaim except the OPA, jointly and severally:

a. Full indemnity or alternatively contribution, in the event and to the extent that she is found in any way liable to the OPA, for any and all amounts found due by her to the OPA

b. Damages in the amount of $24,000,000 (twenty four million dollars), as claimed by the OPA

c. Pre-judgment interest in accordance with s. 128 of the Courts of Justice Act, R.S.O. 1990, c. C. 43

[page756] d. Post-judgment interest in accordance with s. 129 of the Courts of Justice Act, R.S.O. 1990, c. C. 43

e. Full indemnity for all of her costs, plus HST; and

f. Such further and other relief as this Honourable Court may deem just.

89. Each and all of the Defendants by Counterclaim, apart from Mr. Morley, were professionals, fully responsible to supervise, direct and manage Ms. Mardonet, and to provide support and guidance to her. Ms. Mardonet did rely upon each of them, and was reasonably entitled to rely upon each of them in the circumstances.

90. Each of them owed her a duty of care, each according to the OPA each of them breached, and each and all are separately and directly liable to her accordingly.

91. Each of them had a fiduciary obligation to Ms. Mardonet, which according to the OPA each of them breached, and each and all are separately and directly liable to her accordingly.

Issue

[11] Apart from the plea for relief (the claim for indemnity and contribution), these paragraphs, taken on their own, stand as a bare pleading of the existence of a legal relationship between Charlotte (Carla) Mardonet and the defendants by counterclaim, who are individuals. Although nothing is said of it, it is difficult to understand how the Ontario Psychological Association (plaintiff) could owe a duty to Charlotte (Carla) Mardonet independent of the individuals who are defendants by counterclaim. Presumably, the proposition is that the plaintiff is responsible for the actions of those individuals.

[12] Thus, the issue is whether there is any reasonable prospect that the defendants by counterclaim owe a duty, either a fiduciary duty or a duty of care, to Charlotte (Carla) Mardonet such that, to the extent that she misappropriated funds of the plaintiff, they would be required to indemnify her or contribute to the liability she would bear. Is it plain and obvious that such a duty cannot exist? Put in the context of this case, the question is whether it is possible that officers and directors owe a duty to the employees of the company to ensure that they do not cause the employer damage or loss through ". . . fraud and deceit, conspiracy, conversion, breach of fiduciary duty, breach of trust, breach of contract, negligence and fraudulent and/or negligent misrepresentation . . .". 10 In short, do the officers and directors [page757] owe the employees a duty to protect those employees from their own wrongdoing and failings? In considering this issue, it is important to remember that the claim is a claim for indemnity or contribution. As such, it is a claim over by a party who must first have been found to be liable and saying her liability is the responsibility of directors and officers of the corporation.

[13] To me, the answer is clear; there is no such duty that can be applicable to the facts of this case.

Preliminary Issue

[14] Before getting to the analysis of the primary issue, there is a preliminary step. Counsel for the defendants by counterclaim submitted that, in any event, the pleading is insufficient and cannot sustain the counterclaim. To succeed in a claim based either on a fiduciary duty or a duty of care, facts giving rise to the personal liability must be specifically pleaded:

Absent allegations which fit within the categories described above, officers or employees of limited companies are protected from personal liability unless it can be shown that their actions are themselves tortious or exhibit a separate identity or interest from that of the company so as to make the act or conduct complained of their own. 11

[15] It was argued that Charlotte (Carla) Mardonet has failed to plead specifics or material facts that are legally sufficient to maintain any of the causes of action. While she alleges that the defendants by counterclaim owed her a duty of care and fiduciary obligation on which she is entitled to rely, no details are included to establish these relationships.

[16] I do not give any adherence to this submission. The pleadings must be read as a whole. "On a motion such as this, the Statement of Claim must be read generously in favour of the plaintiff." 12 The counterclaim incorporates the statement of defence and the cross-claim. Together, they explain the substance of the allegations being made. The statement of defence reviews the activities of Charlotte (Carla) Mardonet. In particular, it notes that, after 2005, all cheques were reviewed by the executive director who would either sign or initial each one. [page758] It explains the seemingly informal way in which cash was used and withdrawn and refers to the intermingling of personal and association expenditures which are said to have been fully disclosed, authorized and approved, as well as being well known to the auditors. The statement of defence alleges that, in its analysis of the current situation, the Ontario Psychological Association has ignored the costs associated with the "at least ten mailings" 13 the association sent out each year. The pleading speaks of the treatment of overtime and that, in later years, all overtime payments were reviewed and approved by Dr. John Service. Towards the end, the statement of defence summarizes as follows:

The OPA, throughout the period of the Claim had an Executive Director and Finance Committee review Ms. Mardonet's conduct and outside accountants performing a full audit on an annual basis. None of them gave any direction at all to change or adjust the process which Ms. Mardonet followed. In the event and to the extent that there is found to be anything inappropriate to Ms. Mardonet's conduct, which is not admitted but expressly denied, the OPA condoned Ms. Mardonet's conduct by:

i. With full knowledge of how Ms. Mardonet conducted herself in connection with the affairs of the OPA no direction was given to change or adjust, criticize or modify that conduct;

ii. Encouraging Ms. Mardonet to hire her friends and family on a casual basis;

iii. Encouraging Ms. Mardonet to pay not just her friends and family for casual work provided to the OPA, but also to pay the friends and family of other employees, directors and officers of the OPA for such work;

iv. Approving Ms. Mardonet's use of the OPA's cheques, credit card(s), bank card(s) and electronic banking in advance and/or through the review process;

v. Ratifying Ms. Mardonet's use of the OPA's cheques, credit card(s), bank card(s) and electronic banking;

and has accordingly waived any complaint or acquiesced in any such alleged conduct and is a stop thereby from making this claim.

[17] What is evident is that Charlotte (Carla) Mardonet blames the others involved (both the defendants by cross-claim and by counterclaim) for whatever, if anything, went wrong. It is these allegations which are the substance of the proposition that whatever, if any, duty is owed was breached. [page759]

Analysis

[18] The question that remains is whether, in this case, based on its particular facts and context, there can be a duty of care or fiduciary duty owed by officers and directors to an employee, Charlotte (Carla) Mardonet.

[19] The Ontario Business Corporations Act 14 addresses the question of the duty and responsibilities of directors and officers:

134(1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall,

(a) act honestly and in good faith with a view to the

best interests of the corporation; and

(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. 15

[20] The Supreme Court of Canada has described the duty advanced through reliance on the Canada Business Corporations Act 16 (which uses the same words to describe the duties of officers and directors with respect to the corporations it governs 17) as two-tiered. The first, as found in subclause (a), is the fiduciary duty (directors and officers are to act honestly and in good faith with a view to the best interests of the corporation). The second, as found in subclause (b), is the duty of care (the obligation imposed on directors and officers to be diligent in supervising and managing the affairs of the corporation). 18

[21] The Supreme Court of Canada has explained that a fiduciary duty requires that directors and officers must respect the trust and confidence that has been given to them in respect of their responsibility to the corporation. This includes the duty to manage the assets of the corporation, avoid conflicts of interest, avoid positions of abuse to gain personal benefit, maintain confidentiality and to serve the corporation selflessly, honestly and loyally. 19 This duty relates to the corporation and makes no mention of third parties such as employees: [page760]

The various shifts in interests that naturally occur as a corporation's fortunes rise and fall do not, however, affect the content of the fiduciary duty under s. 122(1)(a) of the CBCA. At all times, directors and officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of the creditors or those of any other stakeholders. 20

[22] Essentially, a fiduciary duty is a duty of loyalty. To my mind, it cannot be that the duty of loyalty to the corporation extends to a duty to an employee such that the loyalty to the employee would override any duty the directors or officers owe to the corporation.

[23] In proposing that, in the circumstance of this case, the officers and directors could owe a duty of loyalty to Charlotte (Carla) Mardonet, her counsel extracted the three following phrases from the decision of the Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise: 21

. . . it is clear that the phrase the "best interests of the corporation" should be read not simply as the "best interests of the shareholders".

However, the courts have long recognized that various other factors may be relevant in determining what directors should consider in soundly managing with a view to the best interests of the corporation.

We accept as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. 22

[24] Read carefully, what this suggests (or, rather, confirms) is that the loyalty owed is to the corporation. It does not suggest that there is a duty of loyalty to employees independent of that directed to the corporation, particularly employees that are alleged, by their actions, to have damaged the corporation. These three phrases speak to circumstances where the interests of the employees are the same, stand in conjunction with, do not harm or may advance those of the corporation. The following quotation repeated in Peoples Department Stores Inc. (Trustee of) v. Wise between the phrases referred to above [page761] alludes to these ideas by looking at the problem from a different perspective:

A classical theory that once was unchallengeable must yield to the facts of modern life. In fact, of course, it has. If today the directors of a company were to consider the interests of its employees no one would argue that in doing so they were not acting bona fide in the interests of the company itself. Similarly, if the directors were to consider the consequences to the community of any policy that the company intended to pursue, and were deflected in their commitment to that policy as a result, it could not be said that they had not considered bona fide the interests of the shareholders.

I appreciate that it would be a breach of their duty for directors to disregard entirely the interests of a company's shareholders in order to confer a benefit on its employees: Parke v. Daily News Ltd., [1962] Ch. 927. But if they observe a decent respect for other interests lying beyond those of the company's shareholders in the strict sense, that will not, in my view, leave directors open to the charge that they have failed in their fiduciary duty to the company. 23

[25] The quotation notes that there are circumstances where an officer or director may not be faulted for looking beyond the interests of the corporation (the shareholders) to those of employees and others. It does nothing to oblige officers and directors to do so or to impose a fiduciary duty owed by them to employees of the company to ensure they do not defraud or otherwise fail the corporation.

[26] In this case, by including the corporation itself as a defendant to the counterclaim, Charlotte (Carla) Mardonet is positing a peculiar possibility. If the directors and officers owe a duty to her such that they should indemnify her for any fraud (or any of the other causes of action referred to) for which she is found liable, then the corporation, being responsible for the actions of its directors and officers, may have to indemnify her for whatever liability she has to it. It is doubtful there is any concept of fiduciary duty that could possibly include such a result, particularly where the liability is for fraud or deceit.

[27] It is, of course, true that, quite apart from the fiduciary duty imposed by statute, there can be fiduciary duty imposed by the common law:

The law of fiduciary duty is as old as or older than our common law. It is the key element of the law of equity[.] 24 [page762]

[28] It is the presence of trust and loyalty that sets a fiduciary obligation apart:

. . . the presence of loyalty, trust and confidence distinguishes the fiduciary relationship from a relationship that simply gives rise to tortious liability. Thus, while a fiduciary obligation carries with it a duty of skill and competence, the special elements of trust, loyalty, and confidentiality that obtain in a fiduciary relationship give rise to a corresponding duty of loyalty. 25

[29] The fiduciary relationship is one in which a party is required to act in the best interests of another. A fiduciary relationship has been defined as

A relationship in which one person is under a duty to act for the benefit of another on matters within the scope of the relationship. 26

And as

The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. 27

[30] Here, as with the fiduciary duty authorized by statute (the Ontario Business Corporations Act), it is not possible that a director carrying out his or her duties as a director can be said to have duty to an employee who has through fraud, deceit conspiracy, negligence or negligent misrepresentation, breach of contract or breach of trust harmed and damaged the corporation such that he or she becomes responsible for the wrongdoing and failures of the employee.

[31] This takes me to the second of the two tiers of duty identified by the Supreme Court of Canada in its interpretation of s. 122(1) of the Canada Business Corporations Act which, the words being the same, would apply equally to s. 134(1) of the [page763] Ontario Business Corporations Act. This is the duty of care requiring directors and officers to be diligent in supervising and managing the corporation's affairs (see para. 19, above). 28 "This duty unlike the s. 122(1)(a) fiduciary duty [and, correspondingly, s. 134(1)(a)] is not owed solely to the corporation and thus may be the basis for liability to other stakeholders in accordance with the principles governing the law of tort and extra contractual liability." 29 Nonetheless, neither s. 122(1)(b) nor s. 134(1)(b) provides an independent foundation for claims. 30 However, courts may take these statutory provisions into account in assessing the standard of behaviour that should reasonably be expected. 31 "[B]reach of statute where it has an effect upon civil liability, should be considered in the context of the general law of negligence". 32 It follows that a breach of the statutory duty of care enunciated in s. 134(1)(b) of the Ontario Business Corporations Act does not, by itself, give an employee (or any other stakeholder) a cause of action against an officer or director. If such a cause of action exists, it must be based on the common law duty of care. 33

[32] This requires an application of the analysis prescribed by the House of Lords in Anns v. Merton London Borough Council. 34 The test it set was subsequently rejected in England, 35 but [page764] was recognized and continues to be applied in Canada. 36 It has been said to have been modified by the Supreme Court of Canada in Cooper v. Hobart. 37 The test consists of two stages. The first is the relationship between the parties: is it sufficiently proximate (close and direct) that it is fair to require the defendant to be mindful of the legitimate interests of the plaintiff? In applying this standard, it is necessary to consider the limited assistance the use of the word "proximity" provides. "[T]he term aeproximity' itself is nothing more than a label expressing a result, judgment or conclusion; it does not, in and of itself, provide a principled basis on which to make a legal determination . . . [p]roximity itself may usefully be viewed, not so much as a test in itself, but as a broad concept which is capable of subsuming different categories of cases involving different factors." 38 The Supreme Court of Canada considered the idea of "proximity" in the context of an action for negligent misrepresentation: 39

In order to render "proximity" a useful tool in defining when a duty of care exists in negligent misrepresentation cases, therefore, it is necessary to infuse that term with some meaning. In other words, it is necessary to set up the basis upon which one may properly reach the conclusion that proximity inheres between a representer and the representee. 40

[33] This prima facie determination of whether there is a duty of care includes policy considerations. At this point, the policy concerns are internal to and reflect on the nature of the relationship between the parties. 41 [page765]

[34] It may be that there are circumstances where a director or officer may owe a duty of care to an employee. This might arise where the director or officer was directly implicated and personally involved in decisions or actions which impacted on the safety or treatment of the employee in the workplace. In this case, we are dealing with the misappropriation of money variously described in the statement of claim as being the result of the fraud, deceit, conspiracy, conversion, negligence, breach of trust and breach of contract. The employee seeks protection from the results of these claims, once proved. It is founded on the idea that directors and officers owe a duty to employees to ensure that they do not improperly and illegally make away with money that belongs to their employer. This is not demonstrative of a "legitimate interest of the plaintiff". It is not legitimate because taking money that is not yours is contrary to the law whatever the cause of action used to express it. The proposed duty suggests a positive responsibility placed on officers and directors owed (not to the corporation) but to the employee (the possible fraudster) to ensure that he or she is not deceitful, fraudulent or negligent. If it was the officers and directors who misappropriated the funds, they would be in the wrong. If Charlotte (Carla) Mardonet was, nonetheless, sued, this would be a defence, or where the directors and officers were not sued by the corporation (as they have not been in this case), possibly the basis for a third party action. But such an action would be the result of the wrong done to the plaintiff not a failure of a duty owed to the employee who has been found to be at fault and liable. This counterclaim does not deny wrongdoing by Charlotte (Carla) Mardonet; it presumes it and then says someone else should pay. The four paragraphs that are the subject of this motion demonstrate the legal basis for the claim. They speak to the relief being sought (para. 79), the responsibility of the directors and officers to manage and supervise Charlotte (Carla) Mardonet (para. 80) and the duties alleged to be owed by them to her (paras. 81 and 82). There is nothing else. The statement of defence may outline the facts which are said to support the counterclaim, but it raises no legal foundation to support a cause of action based on a duty owed to an employee by the officers and directors, who were not named as parties in the statement of claim to which the statement of defence responds.

[35] As applied to this case, there is no legitimate interest of the plaintiff (in this case, the plaintiff by counterclaim) raised by the allegation of a breach of duty. If Charlotte (Carla) Mardonet defrauded or was negligent or acted in breach of contract or trust she is the one who must bear the responsibility, not the [page766] officers or directors of the company. As a matter of policy, internal to the relationship, there is simply no basis to say that an officer and director should be duty-bound to save harmless an employee who has defrauded or otherwise improperly made off with money belonging to the corporation. To argue otherwise would allow the employee to benefit from his or her own wrongdoing. The employee took the money, benefitted from it, but having dissipated it, would have no ability and would be under no necessary obligation to return it. That responsibility would, if the presence of the duty is accepted, be left to the officers and directors. Understood in this way, there can be no duty. The requisite proximity as described in these reasons is not and cannot be present. Speaking only in figurative terms, the distance between the responsibility of officers and directors to the misappropriation of money by an employee is too great.

[36] This being so, there is no need for me to consider the second stage of the test in Anns v. Merton London Borough Council. Even so, it may be as well if I make some brief comment. This stage holds that where the first stage has been satisfied, that where proximity has been demonstrated so that there is a prima facie duty of care, the court must consider whether there are any considerations which ought to override or limit the scope of the duty. 42 If I am wrong in my analysis of the first stage of the test, if there is a prima facie duty of care owed by the officers and directors to Charlotte (Carla) Mardonet, it does not matter. There is a policy reason, external to the relationship between the parties, that makes clear no such duty should be recognized or protected. The Ontario Business Corporations Act and the Canada Business Corporations Act describe that the duty of officers and directors is to the corporation. It is not difficult to see that the recognition of a duty of care to protect employees from their own wrongdoing could work to the detriment of the corporation. Apart from everything else, it would leave directors and officers searching out and examining the actions of all manner of employees to ensure none of them were defrauding the company or negligently misusing its assets. It is hard to picture this being anything other than disruptive to the corporation, its organization and operations. Moreover, it is doubtful that with this duty recognized, many people would want to take on the responsibility and accept the appointment as an officer or a director. [page767]

[37] For the reasons reviewed herein, the motion is granted. The offending paragraphs are struck.

Costs

[38] No submissions were made as to costs. If the parties are unable to agree, I will consider written submissions made on the following terms:

(1) On behalf of the moving parties, no later than 15 days after the release of these reasons. Such submissions are to be no longer than four pages, double-spaced, not including any bill of costs, costs outline or case law that may be referred to.

(2) On behalf of the responding party, no later than ten days thereafter. Such submissions are to be no longer than four pages, double-spaced, not including any bill of costs, costs outline or case law that may be referred to.

(3) On behalf of the moving parties, no later than five days thereafter, in reply, if necessary. Such submissions are to be no longer than two pages, double-spaced.

Motion granted.

Notes

1 Rules of Civil Procedure: rule 21.01(2)(b).

2 Hunt v. Carey Canada Inc., 1990 SCC 90, [1990] 2 S.C.R. 959, [1990] S.C.J. No. 93; Dumont v. Canada (Attorney General), 1990 SCC 131, [1990] 1 S.C.R. 279, [1990] S.C.J. No. 17; and Nash v. Ontario (1995), 27 O.R. (3d) 1, [1995] O.J. No. 4043, 1995 ONCA 2934 (C.A.).

3 R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45, [2011] S.C.J. No. 42, at para. 17, referring to Odhavji Estate v. Woodhouse, 2003 SCC 69, [2003] 3 S.C.R. 263, [2003] S.C.J. No. 74, at para. 15; Hunt v. Carey Canada Inc., ibid., at p. 980 S.C.R.; and, generally, to Syl Apps Secure Treatment Centre v. D. (B.), 2007 SCC 38, [2007] 3 S.C.R. 83, [2007] S.C.J. No. 38; Hunt v. Carey Canada Inc., ibid.; and Canada (Attorney General) v. Inuit Tapirisat of Canada, 1980 SCC 21, [1980] 2 S.C.R. 735, [1980] S.C.J. No. 99.

4 Statement of claim, para. 16.

5 Ibid., at para. 17.

6 Ibid., at para. 18.

7 Ibid., at para. 29.

8 Statement of defence and counterclaim (cross-claim), at para. 68(b).

9 Ibid., cross-claim, at para. 68(c); and counterclaim, at para. 79(b).

10 Statement of claim, at para. 1(m)(i).

11 Density Group Ltd. v. HK Hotels LLC, [2014] O.J. No. 3865, 2014 ONCA 605, at para. 163, quoting ScotiaMcLeod Inc. v. Peoples Jewellers Ltd. (1995), 26 O.R. (3d) 481, [1995] O.J. No. 3556, 1995 ONCA 1301 (C.A.), at pp. 490-91 O.R.

12 Festival Hall Developments Ltd. v. Wilkings, [2009] O.J. No. 2400, 57 B.L.R. (4th) 210, 2009 ONSC 29489, at para. 26, citing Williams v. Ontario (2009), 95 O.R. (3d) 401, [2009] O.J. No. 1819, 2009 ONCA 378, 310 D.L.R. (4th) 710 (C.A.), at para. 10.

13 Statement of defence and counterclaim, at para. 17.

14 R.S.O. 1990, c. B.16.

15 Ibid., at s. 134(1).

16 R.S.C. 1985, c. C-44.

17 Ibid., at s. 122(1).

18 Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, [2004] S.C.J. No. 64, 2004 SCC 68, at para. 32.

19 Ibid., at para. 35, referring to Kevin Patrick McGuinness, The Law and Practice of Canadian Business Corporations (Toronto: Butterworths, 1999), at p. 715.

20 Ibid., at para. 43.

21 Ibid., fn. 18.

22 Ibid., Peoples Department Stores Inc. (Trustee of) v. Wise, at para. 42.

23 Ibid. (Peoples Department Stores Inc. (Trustee of) v. Wise), at para. 42, quoting from Teck Corp. Ltd. v. Millar, 1972 BCSC 950, [1972] B.C.J. No. 566, 33 D.L.R. (3d) 288 (S.C.), at p. 314 D.L.R.

24 Bluefoot Ventures Inc. v. Ticketmaster (c.o.b. Citysearch), 2007 ONSC 55363, [2007] O.J. No. 4916, 288 D.L.R. (4th) 191, 41 B.L.R. (4th) 256 (S.C.J.), at para. 17, referring to Clea Parfitt and Melinda Munro, "Whose Interests Are We Talking About: A.(C.) v. Critchley and Developments In the Law of Fiduciary Duty" (1999), 33 U.B.C. L. Rev. 199-214.

25 Ibid. (Bluefoot Ventures Inc. v. Ticketmaster (c.o.b. Citysearch)), at para. 19, referring to Hodgkinson v. Simms, 1994 SCC 70, [1994] 3 S.C.R. 377, [1994] S.C.J. No. 84, at p. 405 S.C.R.

26 Ibid. (Bluefoot Ventures Inc. v. Ticketmaster (c.o.b. Citysearch)), at para. 20, referring to Black's Law Dictionary, 8th ed., at 1315.

27 Ibid. (Bluefoot Ventures Inc. v. Ticketmaster (Citysearch)), at para. 20, referring to Hospital Products Ltd. v. United States Surgical Corp. (1984), 55 A.L.R. 417 (H.C.), at p. 454, quoted in Hodgkinson v. Simms, [1989] B.C.J. No. 979, 43 B.L.R. 122 (S.C.), at p. 164 B.L.R.

28 This expression of the duty is found in the Canada Business Corporations Act, at s. 122(1)(b), and in the Ontario Business Corporations Act, at s. 134(1)(b).

29 Festival Hall Developments Ltd. v. Wilkings, supra, fn. 12, at para. 20, quoting from BCE Inc. v. 1976 Debentureholders, [2008] 3 S.C.R. 560, [2008] S.C.J. No. 37, 2008 SCC 69, at para. 44, in turn, citing Peoples Department Stores Inc. (Trustee of) v. Wise, supra, fn. 18.

30 Ibid. (Festival Hall Developments Ltd. v. Wilkings, supra, fn. 12, at para. 20, quoting from BCE Inc. v. 1976 Debentureholders, at para. 44).

31 Ibid. (Festival Hall Developments Ltd. v. Wilkings, supra, fn. 12, at para. 20, quoting from BCE Inc. v. 1976 Debentureholders, at para. 44), in turn, citing Canada v. Saskatchewan Wheat Pool, 1983 SCC 21, [1983] 1 S.C.R. 205, [1983] S.C.J. No. 14.

32 Ibid. (Festival Hall Developments Ltd. v. Wilkings, supra, fn. 12), at para. 21, citing Canada v. Saskatchewan Wheat Pool, ibid., at p. 225 S.C.R.

33 Ibid. (Festival Hall Developments Ltd. v. Wilkings, supra, fn. 12), at para. 23.

34 Anns v. Merton London Borough Council, [1978] A.C. 728, [1977] 2 All E.R. 492 (H.L.).

35 See Murphy v. Brentwood District Council, [1991] 1 A.C. 398, [1990] 2 All E.R. 908 (H.L.); and Caparo Industries plc v. Dickman, [1990] 2 A.C. 605, [1990] 1 All E.R. 568 (H.L.).

36 See Kamloops (City) v. Nielsen, 1984 SCC 21, [1984] 2 S.C.R. 2, [1984] S.C.J. No. 29 and Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537, [2001] S.C.J. No. 76.

37 Ibid. (for the citation of Cooper v. Hobart) and Festival Hall Developments Ltd. v. Wilkings, supra, fn. 12, at para. 22.

38 Hercules Managements Ltd. v. Ernst & Young, 1997 SCC 345, [1997] 2 S.C.R. 165, [1997] S.C.J. No. 51, at para. 23, referring to Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 SCC 105, [1992] 1 S.C.R. 1021, [1992] S.C.J. No. 40, at p. 1178 S.C.R. (per Stevenson J.), and p. 1151 S.C.R. (per McLachlin J.); see also, M.H. McHugh, Neighbourhood, Proximity and Reliance in P.D. Finn ed., Essays on Torts (1989), 5--42, at pp. 36-37; and, John G. Fleming, "The Negligent Auditor and Shareholders" (1990), 106 L.Q. Rev. 349, at p. 351.

39 In doing this, Justice La Forest was drawing on Canadian National Railway Co. v. Norsk Pacific Steamship Co., supra, fn. 38, which considered whether or not a defendant could be held liable for "contractual relational economic loss".

40 Hercules Managements Ltd. v. Ernst & Young, supra, fn. 38, at para. 23.

41 Festival Hall Developments Ltd. v. Wilkings, supra, fn. 12, at para. 25, quoting from Williams v. Ontario, supra, fn. 12, at para. 16.

42 Anns v. Merton London Borough Council, supra, fn. 34, at pp. 751-52 A.C.; Kamloops v. Nielsen, supra, fn. 36, at pp. 10-11 S.C.R.; and Cooper v. Hobart, supra, fn. 36, at para. 30.