Liability in Construction Contracts: Negligence + The Corporate Veil
October 2023 - 7 min read
A majority shareholder faced potential personal liability due to negligence during project oversight; however, the Alberta Court of Appeal clarified that such liability isn't easily established, emphasizing that the corporate veil isn't readily pierced.
This case underscores the importance of distinguishing between personal and corporate responsibilities in construction projects, shedding light on the rarity of personal liability, particularly in cases involving economic loss.
Will a director and majority owner of a limited liability construction company be liable for failures on a project? What if he is negligent in his oversight of the project and dealings with the owners?
This case demonstrates the difficulty in establishing personal liability where the construction contract is between the owners and a corporate entity, and where the individual’s negligence occurs while that individual is engaged in the business of the corporation.
The defendant, James Metcalfe, owns 99% of the shares of the co-defendant corporation, Tru-Square Homes Ltd.
Metcalfe was contacted by the respondents, the Swanbys, to see if Tru-Square would be interested in acting as a general contractor for the construction of their house in Carstairs. After discussions, Metcalfe provided the Swanbys with a quote totalling $1,064,348 for the entire construction project.
The Swanbys entered into construction contracts with Tru-Square. Metcalfe signed the contracts as the principal of Tru-Square, not in his personal capacity. Construction began shortly after, and Metcalfe was absent for construction over significant periods of time during the first two years.
In year two of construction, an issue arose with respect to leaking windows and leaks through the soffits. Tru-Square took the position that fixing windows was not its responsibility and left the construction site and never returned. The Swanbys then filed a Statement of Claim against Tru-Square and Metcalfe. They alleged numerous deficiencies and stated the house was unsafe and not fit for habitation. They pleaded that Tru-Square was liable to them for breach of contract and alleged that both Tru-Square and Metcalfe were liable in negligence.
The Trial Judge concluded that Tru-Square had breached its contract with the respondents. As for liability in tort, the trial judge found the defendants jointly and severally liable for breach of the duty of care owed to the plaintiffs in the construction of their residence. The trial judge found that Metcalfe treated himself and Tru-Square interchangeably and intermingled the corporations’ affairs with his own. He concluded that Metcalfe was negligent in his oversight of the project and dealings with the Swanbys. As a result, the trial judge found that personal liability should attach to Metcalfe “in these circumstances”.
The trial judge specifically noted that he was not satisfied that Metcalfe’s failure to disclose construction deficiencies was sufficient to constitute fraud. Nor was he prepared to find that his conduct in the oversight of the project amounted to fraud, though he noted the case was “very close to the line”.
Metcalfe appealed the decision and submitted the trial judge erred in law by determining the corporate veil should be pierced and erred in finding him personally liable.
The Alberta Court of Appeal was quick to note that this was not truly a case of piercing the corporate veil. Instead, it was a case of alleged concurrent personal liability in tort. The Court of Appeal explained the trial judge fundamentally erred by failing to distinguish between the two doctrines.
The Court cited Driving force Inc v I Spy-Eagle Eyes Safety Inc to illustrate the difference between the two concepts:
Liability in tort is primarily personal; a tort arises when the tortfeasor breaches a duty imposed on him or her by the law of tort. Corporations are considered to be separate legal persons, with their own rights and obligations; their shareholders and directors are not personally liable for the corporation’s obligations. Corporations, however, can only act through human agents, and any corporate tort generally involves concurrent human actions. There is thus a conflict between these two basic principles: personal liability in tort, and the separate legal personality of corporations.
This engages two separate but overlapping concepts. There are some occasions where the law will “lift the corporate veil”, and find the directing minds behind the corporation responsible for the liabilities and obligations of the corporation. These situations are, however, an exception to the general rule that there is no personal liability for corporate obligations. The related concept is when the corporation and its human agents are concurrently liable in tort. When an individual is found to be concurrently liable for a tort committed in the name of a corporation, this is not truly an instance of “lifting the corporate veil”. The liability of the individual is based on his or her breach of an individual duty owed in tort, not by lifting the corporate veil to impose the corporation’s duty or liability on the individual.
The Court of Appeal relied upon the decisions of Hogarth v Rocky Mountain Slate Inc and Hall v Stewart for factors that should be considered in determining whether concurrent personal liability should be imposed for corporate torts:
- 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”;
- The exception in Said v Butt,  3 KB 497 [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.
In applying the above factors, the Court of Appeal considered whether personal liability should be imposed on Metcalfe in this instance. It was noted that the Trial Judge found that he acted in a negligent manner in his oversight of the projects and dealings with the Swanbys, and was carless in his billing for work not completed. The “negligence” was noted as a breach of the standard of care owed. However, the trial judge failed made no finding that Metcalfe owed a personal duty of care to the Swanbys in tort. Throughout, he acted in the interests of the company, and not for any individual and distinct personal interest.
It was held that all negligent acts of Metcalfe were committed while Metcalfe was engaged in the business of the corporation. After a full examination of the Hogarth and Hall criteria, the Court of Appeal held there was no independent tort liability on the part of Metcalfe, and that the only available remedy to the Swanbys was against Tru-Square.
The Trial Judge’s conclusion that “personal liability should attach to Metcalfe in these circumstances” was held to be unjustified. The Court of Appeal specifically held that “Personal liability cannot be imposed on human agents of the corporation just based on ‘the circumstances of the case’, as the trial judge implied”.
As explained by the Court of Appeal, the critical error made by the trial judge was conflating the concepts of concurrent liability in tort and piercing the corporate veil. Anyone faced with a case of a potential corporate representatives’ concurrent liability for a corporate tort must examine the criteria as set out in Hogarth, Hall, and the guidance of Driving Force. This case reiterates the rarity of any personal liability of an individual in the context of a contractual relationship with a corporate entity.
We recommend that organizations and individuals note the following:
- Although courts are generally unwilling to pierce the corporate veil, they may do so by statute or in the face of extraordinary circumstances.
- Even still, a human agent of a corporation can still be held liable for a tort committed in the name of a corporation. The potential liability of an individual would be based on their breach of an individual duty owed in tort, not by piercing the corporate veil to impose the corporation’s duty or liability on the individual.
- When determining whether concurrent liability should be imposed for corporate torts, there are a number of factors the court will consider. Some of these key factors are:
- Whether the negligent act was committed while the individual was engaged in the business 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 wronged party.
- The expectation of the parties.
- Where the alleged torts against the corporate representative were in pure economic loss (as they were in the Swanby case), concurrent liability in tort is very unlikely to apply. It has been applied in cases of intentional torts of assault, trespass, nuisance, or personal injury.
If you are party to a construction contract where corporate liability is an issue, contact Jill Bishop in Calgary, Jeremy Taylor in Edmonton, or any member of Field Law's Litigation Group for assistance.
Link to decision: Swanby v Tru-Square Homes LTD, 2023 ABCA 224