Private industry hazards

A WORD OF CAUTION: A CA WHO ACTS AS CFO CAN BE PERSONALLY LIABLE TO HIS OR HER EMPLOYER FOR LOSSES TO THE COMPANY

In the past few years, there has been intense media focus on the public accounting profession and its accountability for the financial results of reporting companies. However, little attention has been paid to the possible legal liability of chartered accountants engaged as employees in private industry. There are at least two distinct situations in which a CA, acting as a controller or CFO, may find him or herself facing personal liability: individually to third persons with whom he or she deals on behalf of his or her employer, and to the employer.

Liability to third persons

It has been clearly established that professionals engaged in public practice cannot hide behind the "corporate veil" to distance themselves from personal liability. In a BC case, Strata Plan No. VR1720 v. Bart Developments [1999] B.C.]. No. 382 (BCSC), Justice Edwards had this to say about individual engineers not having personal liability for the negligent performance of engagements by their consulting employer: "Limited companies cannot exercise professional functions except through qualified individual employees. Those employees must realize it is their skill and experience the clients are engaging and will rely upon. They therefore owe a concomitant duty of care to those clients and are potentially liable in tort if they fail to meet that duty."

What of the CFO who prepares monthly financial statements, lists of accounts receivables and payables and forwards them to the banker or a supplier?

The CA, whether in public practice or private industry, is bound by the Rules of Professional Conduct. The provincial institutes impose the same obligations of integrity and due care upon a CA CFO in preparing financial statements for the bank as if that CA were in public practice. But does the law?

There are two diverging schools of thought. The traditional view was that an employee who causes a breach of contract between his or her employer and a third person cannot be liable in tort at the suit of that third party (Said v. Butt [1920] 3 K.B. 497 at p. 505; Lehndorff Canadian Pension Properties v. Davis 6 Co., [1987] BCJ No. 85 at p. 5). However, more recent cases suggest the traditional view has been abandoned. The case of London Drugs Ltd. v. Kuehne & Nagel International Ltd. [1992], 73 B.C.L.R. (2d) 1 (SCC) is an unfortunate example of everything that can possibly go wrong in litigation.

Kuehne & Nagel was warehousing a transformer owned by London Drugs pursuant to an agreement that contained an express limitation of liability for any damage to the transformer at $40. Two employees of Kuehne & Nagel were negligently operating forklifts, whereupon they dropped and broke the $32,000 transformer. The insurer for London Drugs, in an attempt to circumvent the $40 limitation in the warehousing contract, also sued the two employees, arguing they owed a distinct duty of care to London Drugs and could not claim the benefit of the limitation clause because they were not parties to the contract. Despite the small amount involved, the case went through the BC courts to the Supreme Court of Canada.

The Supreme Court issued three separate reasons for judgment holding the employees personally liable, but limiting their liability to the $40 limit in the warehousing agreement. Mr. Justice Iacobucci in writing for the majority of the court wrote: "There is no general rule in Canada to the effect that an employee acting in the course of his or her employment in performing the 'very essence" of his or her employer's contractual obligations with a customer, does not owe a duty of care to the employer's customer.

'Our law of negligence has long since moved away from the category approach when dealing with duties of care.

"It is now well established that the question of whether a duty of care arises will depend on the circumstances of each particular case, not on predetermined categories and blanket rules as to who is, and who is not, under a duty to exercise reasonable care."

In 1995 and 1999, the Ontario Court of Appeal attempted to set forth a rational test upon which to determine whether an employee owed an independent duty of care to third persons arising out of his employment activity. In Montreal Trust Co. of Canada v. Scotia McLeod Inc. (1995), 129 D.L.R. (4th) 711 at 720, as approved in ADGA Systems International Ltd. v. Valcom Ltd. (1999), 168 D.L.R. (4th) 351, the Ontario Court of Appeal concluded that absent fraud, deceit or want of authority "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."

This reasoning was misapplied in BC in 1999 in a case known as Rafiki Properties Ltd. wherein the learned trial judge appears to have misread the Montreal Trust decision and substituted the word "and" for the word "or," temporarily creating for BC a two-part test upon which to find personal liability. Two subsequent decisions of the Supreme Court of BC applied Rafiki until February 2003 when Mr. Justice Ian Melnick in Glenayre Manufacturing Ltd. v. Pilot Pacific Properties Inc., 2003 BCSC 0303 noted the error of the earlier BC decisions and applied the Ontario law.

In short, the way is open for creditors to pursue the CFO who, in the course of employment, negligently misrepresents the financial affairs of his or her employer. This in turn raises the question of whether the insurance industry would be prepared to respond and provide third-party liability insurance to CAs in private industry.

Liability of the CA to the employer

Most individuals are surprised at the concept that an employee can be personally liable to an employer for negligently carrying out his or her employment duties. When pressed, most will concede they would expect that exceptions to that rule would involve deceit, fraud or breach of authority. Perhaps this perception is further enforced by WCB legislation and general insurance principles wherein the employee comes within the definition of the named insured and is thus protected from subrogation by the employer's insurer. The law however suggests otherwise.

In the 1970s, the general manager of Wallace Transfer Ltd. was responsible for the administration of the company's lease with its landlord. He failed to give the neeessary notice to terminate the tenancy as instructed. When the landlord sued Wallace Transfer, Wallace Transfer in turn sought indemnity from the general manager in third-party proceedings.

In a two-to-one decision, the BC Court of Appeal in D.H. Overmyer Co. v. Wallace Transfer Ltd. (1976), 65 DLR (3d) 717 (BCCA) held that the manager was liable to indemnify his employer on the basis he had breached his duty of care to exercise his managerial duties with reasonable care and skill.

In 1989, the Ontario District Court in Dominion Manufacturers Ltd. v. O'Gorman (1989), 24 C.C.E.L. 218 held a former accountant and comptroller liable to his employer for failing to remit employee withholdings for income tax purposes when the employer was assessed penalties and interest. The accountant was also found liable to his former employer for the additional audit fees made necessary because the books and records of the company were so inadequately maintained.

The Ontario court reviewed a number of English and Canadian decisions as well as the Wallace Transfer decision and summarized the following proposition: a person who professes skill in a calling is bound by law to show a reasonable amount of such skill in the performance of his or her duty even where the duties are under a contract of employment.

In 1996, the Alberta Queen's Bench held that a construction supervisor had failed to properly ensure that the appropriate forms were used to construct a single block of municipal concrete sidewalks. The municipality required the sidewalks to be replaced at a cost to his employer of $45,000. In a counterclaim in response to the employee's suit for wrongful dismissal, Mr. Justice Fraser in Pelione v. Marmot Concrete Services Ltd. [1996] AJ No. 104 (Alta. QB) allowed the $45,000 claim. The Alberta court held that the loss was directly caused by Mr. Pelione's breach of his implied obligation pursuant to his contract to supervise the work to the degree, skill and care expected of a person of that experience holding that position.

These cases serve to dispel the myth that employees in management positions who are expected to use their education, skill and experience cannot be held liable to their employers for damages in the nature of pure economic loss when they fail to meet the standard of care expected of a reasonable person in their position.

Thus the CA who acts as the corporate CFO is exposed to personal liability to his or her employer for losses to the company by inadvertence, oversight or failure to comprehend the employer's obligations with respect to tax installments or other omissions, where the skill of the CA is being relied upon by the employer. Recent claims that I have defended have included the alleged failure to properly calculate and remit GST for a new housing developer that resulted in extensive penalties and interest payable by the former employer.

There is no insurance product available to my knowledge that will provide coverage for claims against a CA by his or her own employer. Thus a word of caution to those CAs in private industry.

[Sidebar]

Most individuals are surprised at the concept that an employee can be personally liable to an employer for neqliqentiy carryinq out his or her employment duties

[Author Affiliation]

David B. Wende, LLB, is with Alexander Holburn Beaudin & Lang in Vancouver

Technical editor: Mindy Paskell-Mede, BCL, LIB, partner Nicholl Paskell-Mede in Montreal