When a person starts a business, they often face several important decisions starting from its conception. One of the first decisions an owner must make is whether or not to incorporate their business. Before making this determination, it can be helpful to consult with an experienced corporate lawyer to ensure that you make the correct decision based on their goals for the company. Many business owners, however, do incorporate their companies to shield themselves from liability risks related to the business, such as bankruptcy and civil disputes.
In a recent decision from the Court of Appeal of Alberta, the Court considered an appeal from a business owner who had been found jointly liable after customers sued the construction company he owned.
In Swanby v Tru-Square Homes Ltd, the respondents had purchased land in Carstairs in either 2009 or 2010 to build a family home on. After retaining a design firm, the couple contacted the appellant’s company (“TS”). The appellant was a 99% shareholder of TS and lived next door to the brother of the husband in the respondent’s family. At first, the appellant declined the project as he had been prepared to wind down the business. However, in July 2011, he provided the respondents with a quote of $1,064,348, which was inclusive of all the house costs, including furnishing. The respondents agreed to this and hired TS as the general contractor for the project on August 22, 2011. The contracts were signed by the respondents as well as the appellant, but only on behalf of TS and not in a personal capacity.
Several sub-contractors were hired to help with the construction project. Evidence before the Court indicated that the appellant was not present throughout substantial periods of construction between 2011 and 2013. By May 2013, there were issues related to the home’s construction, which included leaking windows and subsequent water damage. TS did not believe that it was responsible for fixing the windows and left the construction site without returning.
The respondents sent both appellant and TS an extensive list of alleged construction deficiencies in the home. They also hired a new general contractor and began remediation work in the summer of 2014. The respondents eventually took possession of the house in September 2015, which was two years later than they had originally planned.
During construction, the respondents had filed a statement of claim against TS, as well as the appellant and his spouse, relating to 49 alleged deficiencies which the respondents said “were the result of a deliberate plan to cut corners, deviate from the Building Contract requirements, the Plans, and the Code, and to obtain the (respondents’) funds without providing the value or quality that the (respondents) paid for.”
The respondents claimed that the appellant should be held personally liable for these deficiencies because he had personally engaged in a fraudulent scheme and misrepresented the state of the project, adding he should be “personally liable for such fraudulent conduct.”
After reviewing the facts and evidence presented to the Court, the trial judge concluded that:
“(TS) breached its contract with the (respondents). Contrary to their agreement, numerous aspects of the construction failed to meet Code standards, let alone the higher standard advocated by the (respondents) and their experts. Further, (TS) failed to provide proper supervision of the subcontractors.”
Further, the trial judge found that while no contractual liability should be assigned to the appellant, since he was not a party to the contract in his personal capacity, there was liability to be found in tort because he had acted in a negligent manner. The trial judge found that the appellant was negligent “in his oversight of the project and in his dealings with the respondents).” This led the Court to find that both the appellant and TS were jointly liable for the construction company’s negligence during the construction process.
When the owner of a company is found liable for the actions of the company, it is known as “piercing the corporate veil.” While incorporation of a business generally protects the business owner from liability, an owner may be held personally liable in some circumstances, requiring the corporate veil to be “pierced.”
The Court noted that it is uncommon for courts to lift or pierce the corporate veil without a statutory reason or a set of extraordinary circumstances to justify it. In this instance, the Court found that piercing the corporate veil was not appropriate. Instead, it determined that the case facts related to alleged concurrent liability by the construction company and its owner. The Court of Appeal found that this was a fundamental flaw in the trial judge’s reasoning.
The Court’s analysis found that the appellant was not liable for anything beyond what TS was liable for, as no specific allegations were made against him. Further, in order for personal liability to extend to the appellant, the respondents would be required to prove several factors, as set out in the case of Hall v. Stewart, were present, including:
- Whether the negligent act was committed while engaged in the business of the corporation, and whether the negligence of the employee was contemporaneous with that of the corporation;
- Whether the individual was pursuing any personal interest beyond the corporate interest;
- Whether the director or corporate representative owed a separate and distinct duty of care towards the injured party;
- Whether the conduct was “in the best interests of the company”;
- Whether the plaintiff voluntarily dealt with the limited liability corporation or had the corporate relationship “imposed” on it;
- The expectations of the parties;
- Whether the tort was “independent”;
- Whether the exception in Said v Butt applies [where the director or servant actually takes part in or authorizes such torts as assault, trespass to property, nuisance, or inducing breach of contract];
- The nature of the tort, and particularly whether it was an intentional tort;
- Whether the damage was physical or economic.
Ultimately, the Court of Appeal overturned the trial judge’s decision and held that no personal liability would be assigned to the appellant.
At DBH Law, our team of construction lawyers have the experience and technical knowledge to provide you with comprehensive legal advice in the modern construction industry. We understand that the moving pieces involved in both small and large-scale construction projects can quickly result in deficiencies and disputes between parties. Our firm works with our clients to resolve matters in a cost-effective and efficient manner. To schedule a confidential consultation with a member of our team and learn how we can help you, contact us online or by phone at 403.252.9937.