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The corporate identification doctrine clarified through an intervention in the Supreme Court of Canada

corporate identification

A corporation is of course an abstract entity. It is a legal person, but can only act through human beings. Certain causes of action, such as fraud or knowing assistance of a breach of trust, have a knowledge requirement: the defendant can only be held liable if he or she – or it, in the case of a corporation – has knowledge of certain facts. How can a corporation be held liable for having certain knowledge if it has no brain to possess that knowledge?

The law has developed the corporate identification doctrine to deal with this situation. Subject to certain restrictions, the knowledge of a corporation’s directing mind – the individual or individuals who control the actions of the corporation – can be attributed to the corporation itself. 

In 1985, the Supreme Court of Canada articulated the following test in Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662: the corporate identification doctrine operates where the action taken by the directing mind (a) was within the field of operation assigned to him or her; (b) was not totally in fraud of the corporation; and (c) was by design or result partly for the benefit of the corporation.

In 2017, the Supreme Court of Canada added an additional element to the Canadian Dredge test. Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 at para. 104 held that a court may decline to apply the corporate identification doctrine if it would be in the public interest to do so. In other words, even if the Canadian Dredge requirements are met, a court can decline to attribute the knowledge of a directing mind to a corporation if it would not be in the public interest to hold the corporation liable.

In 2018, the Ontario Court of Appeal injected confusion into the Canadian Dredge test by turning Livent on its head. The Court of Appeal held that Livent meant that the test could be applied in a “less demanding fashion”, meaning that the knowledge of a directing mind could be attributed to a corporation even if the Canadian Dredge criteria were not met.

This holding was highly concerning for Canadian business. It introduced considerable uncertainty into the Canadian Dredge test: what exactly did it mean to apply the Canadian Dredge criteria in a “less demanding fashion”? Moreover, it raised the prospect of a significant increase in corporate liability for the misdeeds of individual employees, thereby imposing costs on innocent shareholders and other stakeholders.

As a result, when the Ontario Court of Appeal’s decision was appealed to the Supreme Court of Canada, the Canadian Chamber of Commerce intervened in the appeal, represented by Geoff R. Hall, Anu Koshal and Natalie V. Kolos of McCarthy Tétrault LLP. The Canadian Chamber of Commerce, whose membership consists of thousands of Canadian businesses large and small, asked the Supreme Court of Canada to confirm its holding in Livent and disavow the Ontario Court of Appeal’s interpretation.

In Christine DeJong Medicine Professional Corporation v. DBDC Spadina Ltd., 2019 SCC 30, the Supreme Court of Canada did exactly that. The Supreme Court accepted the submissions of the Canadian Chamber of Commerce, and confirmed that Canadian Dredge sets out the minimum requirements for the corporate identification doctrine to apply. This is a welcome development for Canadian business, as it restores certainty to the Canadian Dredge test and places appropriate limits on the corporate identification doctrine.

The experience also shows the power of an intervention in the Supreme Court of Canada. DeJong was an immensely complex case, raising a number of legal issues in a complicated factual setting. By intervening, the Canadian Chamber of Commerce placed a spotlight on the corporate identification doctrine and the problem created by the Ontario Court of Appeal. Had the intervention not occurred, the issue might not have received the specific and clear treatment that it did in the Supreme Court of Canada’s reasons. This is a lesson for Canadian business: the Supreme Court of Canada is interested in its views, and will take them into consideration if those views are presented in an appropriate fashion in an intervention.

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McCarthy Tétrault LLP

McCarthy Tétrault is a Canadian law firm that delivers integrated business law, litigation services, tax law, real property law, labour and employment law nationally and globally.McCarthy publishes a series of blogs to share information with companies to help them comply and manage their businesses. On the Inside Internal Controls blog we will share some of those blog posts sharing their expertise among others, in the areas of Competition/Anti-trust, Corporate and Commercial Law, Intellectual Property, Privacy, Environmental Law, Technology and Litigation. Read more here
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