A recent decision of the Ontario Superior Court of Justice addresses directors’ duties towards the corporation and its employees. Specifically, the court addressed whether a director or officer’s fiduciary duties extend to protecting an employee from the consequences of that employee’s own fraudulent acts.
In Ontario Psychological Association v. Mardonet, 2016 ONSC 4528, the court considered an unusual argument. The pleadings were complicated but, in essence, the Ontario Psychological Association (OPA), a not-for-profit corporation, had sued a former employee for misappropriating approximately $1.6 million. The employee, Ms. Mardonet, had been in a management role and was accused of engaging in various forms of fraud to funnel corporate funds to herself and related persons. Ms. Mardonet had (among other things) counterclaimed for indemnity from the officers and directors on the basis that they had failed to supervise her properly through their individual responsibilities as officers or their involvement with the board of directors. She argued that these individuals had been aware of her conduct and had effectively acquiesced to it. The court considered a motion to strike this counterclaim for having no basis in law.
The court addressed whether there is a fiduciary duty owed by officers and directors to an employee. The court cited various corporate statutes which articulate the duty of officers and directors and noted that such duties are generally broken into two components: the fiduciary duty and the duty of care. The court stated that the fiduciary duty is effectively a duty of loyalty and confirmed that it is owed to the corporation and not to any third parties such as employees. The directors may consider interests beyond those of the corporation, including those of employees or other stakeholders, but that the directors are not bound to do so or liable to these stakeholders. The court stated:
If the directors and officers owe a duty to her such that they should indemnify her for any fraud … 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 that there is any concept of fiduciary duty that could possibly include such a result, particularly where the liability is for fraud or deceit.
The court also addressed the duty of care owed by directors and officers, which requires that they exercise the care, diligence and skill of a reasonable person in carrying out their function. The court stated that this statutory duty of care, which is not owed solely to the corporation, is not an independent ground of liability. Instead, the statutory duty merely informs the standard of behaviour that should reasonably be expected from directors and officers in relation to their potential liability for breach of the common law duty of care. The court also held that the employee had no claim for common law negligence against the directors and officers. Lederer J. expressed the principle in various ways, but essentially held that where an employee commits fraud or theft against their employer, the employee must bear sole responsibility for his or her wrongdoing. Accordingly, the court dismissed the employee’s counterclaim.
The result in this case is hardly surprising. It would be strange indeed if in circumstances of employee fraud or theft, the directors or officers of the employer corporation could be held liable to that employee for the consequences of that employee’s wrongdoing.
The case is nonetheless a good reminder of the duties to which corporate directors and officers are subject. Directors and officers must act in the best interests of the corporation and must exercise a reasonable standard of care in doing so. This includes managing or supervising the management of the corporation and ensuring that its assets and resources are appropriately safeguarded. While a director’s or an officer’s failure to meet this duty does not give rise to liability to an employee who misappropriates corporate funds, it may result in liability to the corporation. Directors and officers should ensure that appropriate internal controls are in place to minimize the risk of fraud. If it has not done so recently, the Board should review its policies in this regard and consult, if necessary, with the corporation’s advisors. Ongoing diligence is required to protect the corporation’s interests and ensure that the directors and officers meet their legal duties.