2012 NBCA 92, 2012 NBCA 92

COURT OF APPEAL OF NEW BRUNSWICK 151-11-CA 172-11-CA SIMSON, CUMMING, WEBBER, a partnership, CUMMING, WEBBER, FRANCOEUR, a partnership, JOHN R. SIMSON, BRUCE C. CUMMING, JOHN E. WEBBER, MARK D. FRANCOEUR and TERRENCE L. THORNE (Defendants) APPELLANTS SIMSON, CUMMING, WEBBER, société en nom collectif, CUMMING, WEBBER, FRANCOEUR, société en nom collectif, JOHN R. SIMSON, BRUCE C. CUMMING, JOHN E. WEBBER, MARK D. FRANCOEUR et TERRENCE L.

THORNE , (Défendeurs) APPELANTS - and - - et - DALE BARTEAU, GLENNA BARTEAU, CONSTANCE ROGERSON, GILBERT STUART, ALLISON PENDLETON, WELDON LAMBERT, ELIZABETH DARKE, LAURIE PENDLETON, BRIAN YOUNG, BRYAN BARTEAU, PHILIP MINER, GLENN COX, EDWARD POWER, FLOYD RICHARDSON, DANA CONLEY and BRIAN CALDER (Third Parties) RESPONDENTS DALE BARTEAU, GLENNA BARTEAU, CONSTANCE ROGERSON, GILBERT STUART, ALLISON PENDLETON, WELDON LAMBERT, ELIZABETH DARKE, LAURIE PENDLETON, BRIAN YOUNG, BRYAN BARTEAU, PHILIP MINER, GLENN COX, EDWARD POWER, FLOYD RICHARDSON, DANA CONLEY et BRIAN CALDER , (Mis en cause) INTIMÉS - and - - et - DEER ISLAND CREDIT UNION LIMITED, a body corporate (Plaintiff) RESPONDENT DEER ISLAND CREDIT UNION LIMITED, corps constitué , (Demanderesse) INTIMÉE Simson et al. v.

Deer Island Credit Union Limited and Barteau et al. 2012 NBCA 92 Simson et autres c. Deer Island Credit Union Limited et Barteau et autres, 2012 NBCA 92 CORAM: The Honourable Justice Richard The Honourable Justice Bell The Honourable Justice Quigg CORAM : L’honorable juge Richard L’honorable juge Bell L’honorable juge Quigg Appeal from a decision of the Court of Queen’s Bench: November 30, 2011 Appel d’une décision de la Cour du Banc de la Reine : Le 30 novembre 2011

History of Case: Decision under appeal: 2011 NBQB 334 Historique de la cause : Décision frappée d’appel : 2011 NBBR 334 Preliminary or incidental proceedings: Court of Appeal [2011] N.B.J.

No. 473 (QL) Court of Queen’s Bench 2011 NBQB 276 Procédures préliminaires ou accessoires : Cour d’appel [2011] A.N.-B. no 473 (QL) Cour du Banc de la Reine 2011 NBQB 276 , 2011 NBBR 276 Appeal heard and judgment rendered: March 22, 2012 Appel entendu et jugement rendu : Le 22 mars 2012 Reasons delivered: November 1, 2012 Motifs déposés : Le 1er novembre 2012 Counsel at hearing: For the appellants on Appeal Case 151-11-CA: Sandra E. Dawe For the appellants on Appeal Case 172-11-CA: John P. Barry, Q.C. and Nadia M. MacPhee For the respondent, Deer Island Credit Union Limited: Mark A. Canty, Q.C.

For the respondents (third parties): Richard Bird, Q.C. Avocats à l’audience : Pour les appelants au dossier no 151-11-CA : Sandra E. Dawe Pour les appelants au dossier no 172-11-CA : John P. Barry, c.r. et Nadia M. MacPhee Pour l’intimée, Deer Island Credit Union Limited : Mark A. Canty, c.r. Pour les intimés (mis en cause) : Richard Bird, c.r.

THE COURT The appeals are allowed. The decision of the Court of Queen’s Bench striking out the Third Party Claim is set aside. The appellants are entitled to costs against the applicant third parties in the amount of $2,000 on the motion, and on appeal in the amount of $5,000. LA COUR Accueille les appels. La décision de la Cour du Banc de la Reine radiant la mise en cause est annulée. Les appelants ont droit, pour la motion, à des dépens de 2 000 $ de la part des mis en cause requérants, et droit à des dépens de 5 000 $ pour l’appel. The following is the judgment delivered by THE COURT I.

Introduction and Background [ 1 ] Between September 25, 1995, and June 30, 2007, Wendy Earle, an employee of the Deer Island Credit Union, misappropriated $1,849,576 from her employer. The Credit Union seeks to recover its losses by suing its auditors in breach of contract and negligence. The auditors filed a statement of defence and brought a third party claim against the directors of the credit union.

In their third party claim, the auditors contend the directors negligently performed their duties by, inter alia , failing to follow recommendations made by the auditors, failing to follow recommendations made by the Brunswick Credit Union Stabilization Board and, generally, failing to perform their duties as set out in the Credit Unions Act , S.N.B. 1992, c. C-32.2. The auditors contend that, had the directors complied with the Act and followed their recommendations and those made by the Stabilization Board, the misappropriation would have been discovered, resulting in no loss to the Credit Union.

The third parties filed a motion pursuant to Rules 23.01 and 27.09 of the Rules of Court requesting that the third party claim be struck. [ 2 ] The motion judge heard oral argument over two days and received written submissions. On October 7, 2011, he delivered his decision in which he allowed the motion and struck the third party claim.

In that decision he speculated as follows: Although the Third Party Claim was issued on behalf of the auditors, I doubt that it was issued on their initiative. […] [para. 45] [Emphasis added.] After apparently concluding, without any evidence, that the auditors were not providing instructions to counsel, the motion judge then observed as follows, before hearing any argument on the costs issue: […] [T]his is a rare and exceptional case in which it may be appropriate:

a) to make an award of full solicitor and client costs in favour of the directors;

b) to order that such costs be paid by the auditors’ solicitor personally ; and

c) To “compel” payment by the judicious exercise of the power to imprison for contempt .

[para. 45] [Emphasis added.] [3] The motion judge then heard two days of oral submissions on costs. On November 30, 2011he delivered his decision, in which he compelled counsel, Sandra E. Dawe, to personally pay $45,087.00 by “12:00 noon on ThursdayDecember 15 […]”. In a clear threat to imprison Ms. Dawe, the motion judge ordered that if the costs were not paid by the deadline,Ms.

Dawe was to personally appear at an enforcement hearing to be held in Saint John at 12:30 p.m. on Friday December 16, 2011. [4] In two separate appeals, the auditors appeal the order striking the third party claim, and boththe award of solicitor and client costs and the order that Ms. Dawe personally pay those costs. On March 22, 2012, this Court allowedboth appeals and advised the parties that reasons would follow. These are our reasons for allowing the appeals. II.

Appeal from decision on motion to Strike the Third Party Claim [5] For convenience the Third Party Claim is attached to these reasons as Appendix “A”. Weallowed the appeal from the dismissal of the Third Party Claim based upon the following errors by the motion judge. A. Misapplication of Rule 23.01 [6] We state the obvious when we note that this matter did not come before the motion judge byway of a motion for

summary judgment under Rule 22. Despite the fact the third parties drafted their motion to include claims underboth Rule 23 and 27, it is evident from the pleadings and argument that they principally relied upon Rule 23.01(1) (b). The motion fell tobe decided upon the very clear language of Chief Justice Drapeau in Sewell v. ING Insurance Co. of Canada, 2007 NBCA 42, 314N.B.R. (2d) 330. In what we consider to be a judicial codification of the principles to be applied on such motions, Drapeau C.J.N.B.states: The principles that inform the determination of a defendant's motion to strike under Rule 23.01(1)(

b) are well settled and can besummarized as follows: (1) the only question for judicial resolution is whether it is plain and obvious that the Statement of Claim fails todisclose the essential elements of a cause of action tenable at law. That conclusion should be reached only in the clearest of cases; (2)correlatively, absent exceptional circumstances, the court must accept as proved all facts asserted in the Statement of Claim and abstainfrom looking beyond the pleading itself and any documents referred to therein (see Hogan v. Doiron et al. (2001), 243 N.B.R. (2d) 263,[2001] N.B.J.

No. 382 (QL), 2001 NBCA 97, para. 38 and Boisvert v. LeBlanc (2005), 294 N.B.R. (2d) 325, [2005] N.B.J. No. 561(QL), 2005 NBCA 115, para. 21). To expand the exercise beyond those limits would operate to morph the motion under Rule 23.01(1)(b)into an application for

summary judgment under Rule 22, the appropriate vehicle to determine prior to trial whether there is factual meritto a claim; (3) the Statement of Claim is to be read generously to accommodate drafting deficiencies; and (4) where a generous readingof its provisions fails to breath life into a pleading, all suitable amendments should be allowed (see Rule 27.10(1) and LeDrew et al. v.Conception Bay South (Town) (2003), 231 Nfld. & P.E.I.R. 61, [2003] N.J. No. 276 (QL), 2003 NLCA 56).

Those principles reflect theLegislature's injunction that the Rules be "liberally construed to secure the just, least expensive and most expeditious determination ofevery proceeding on its merits": Rule 1.03. [para. 26] [7] Chief Justice Drapeau’s concern that a Rule 23 motion might be morphed into a Rule 22motion for

summary judgment is, in our view, precisely what occurred in this case. This is evident when the motion judge notes that heis to be guided by the principles set out by Drapeau J.A. (as he then was) in, and quotes from, the seminal Rule 22 case of Cannon v.Lange (1998), (NB CA), 203 N.B.R. (2d) 121, [1998] N.B.J.

No. 313 (C.A.) (QL). [8] The motion judge’s reliance upon the principles applicable to Rule 22 motions caused him tooverlook the two foundational principles of Rule 23 motions, namely: (1) the court must accept as proved all the facts set out in theStatement of Claim; and, (2) the motion can only succeed if it is plain and obvious that the Statement of Claim (or, in this case, the ThirdParty Claim) fails to disclose the essential elements of a cause of action. The Third Party Claim contains assertions of fact, which, ifproven, would constitute the essential elements of a negligence action against the directors.

We are of the view there was no basis for

allowing the motion under Rule 23 or any other Rule pleaded by the third parties. B. Misapplication of the law relating to the limited liability of a corporation [9] The motion judge relies extensively on the decision in Piedra v. Copper Mesa MiningCorporation, 2011 ONCA 191, [2011] O.J. No. 1041 (QL) to conclude “courts must protect directors from ill-founded litigation” (para.21) and that the “common law generally protects directors of corporations from personal liability” (para. 35). In reaching theseconclusions, we are of the view the motion judge misapplied Piedra.

Furthermore, he misapplied the jurisprudence from the seminalcase of Salomon v. Salomon & Co. Ltd., [1895-9] All E.R. 33 (H.L.). [10] In Piedra, the plaintiffs opposed a proposed mining project in Ecuador, which was to be carriedout by a subsidiary of Copper Mesa. The plaintiffs claimed they were subjected to a campaign of intimidation, harassment, threats andviolence carried out by the security agents of the subsidiary. They sued the Toronto Stock Exchange, the parent company, Copper Mesa,and two non-management directors. The directors were not sued in negligence.

The claims against them alleged they had a legal duty to“avoid acts or omissions that caused or materially contributed” to the intentional torts committed against the plaintiffs. In sum, theaction against the directors contended they were vicariously liable for the actions of the security personnel in Ecuador.

Cronk J.A.described the claim in part as follows: […] although there are several facets to the plaintiffs’ claims against the Directors, the plaintiffs’ pleadings contain virtually noparticulars of any personal wrongdoing said to have been committed by the Directors. […] Tellingly, the plaintiffs also fail to allege that the torts at issue were carried out at the direction or on the instructions of, or with theapproval or actual knowledge of the Directors.

Aside from the alleged failure to join corporate social responsibility governanceframeworks (a voluntary undertaking) and a general failure to investigate, the plaintiffs do not claim any connection between the harmsalleged and the Directors’ conduct. [paras. 81-82] [11] Cronk J.A. concluded that a corporate director has no established duty in law to be mindful ofthe interests of strangers to the corporation when discharging his or her duties as a director.

Since the proposed duty of care was notrecognized in law, the Court was required to apply what has become known as the Cooper-Anns test to determine whether the novel dutyshould be given legal recognition. That test derives from Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.) and Cooperv. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537 as confirmed in Edwards v. Law Society of Upper Canada, 2001 SCC 80, [2001] 3 S.C.R.562.

The Coopers-Ann test consists of two stages: (1) the evaluation of whether a relationship is sufficiently proximate and direct that itis fair to require the defendant to be mindful of the legitimate interests of the plaintiff; and (2) presuming a prima facie duty of careexists, whether there are any policy reasons that militate against recognizing the novel duty (see Williams v. Canada (A.G.), 2009 ONCA378, [2009] O.J. No. 1819 (QL), leave to appeal refused, [2009] S.C.C.A.

No. 298 (QL)). [12] In Piedra the Court concluded the claims against the Directors were novel and that the first partof the Cooper-Anns test, proximity, was not met. As a result the pleadings were struck. In the present case the claims against the thirdparties are not novel. Because negligence claims against directors constitute part of the legal landscape in Canada, the issue which arosein Piedra, the application of the Cooper-Anns test, has no relevance to the real issues between the appellant and the third parties. [13] Although the motion judge does not specifically mention Salomon v. Salomon & Co.

Ltd., hispreoccupation with the need to protect corporate directors appears to be based upon a flawed understanding of the principle flowing fromSalomon that, once legally incorporated, a corporation must be treated like any other independent person, with rights and liabilitiesappropriate to itself. The “corporate veil” should not, in general, be lifted to make principals of the corporation liable for its obligations. However, the corporate veil is not lifted where a plaintiff or third party relies upon an independent cause of action against the principalsof the company.

The evolution of the jurisprudence in this regard, commencing with Salomon, is carefully and succinctly set out inADGA Systems International Ltd. v. Valcom Ltd et al, (ON CA), [1999] O.J. No. 27 (C.A.) (QL), leave to appealrefused, [1999] S.C.C.A. No. 124 (QL). [14] In ADGA, the plaintiff claimed the corporate defendant, its director and two employees raided

the plaintiff’s employees and thereby caused economic loss. The question before the Court was whether the director and employeescould be sued for their actions as individuals assuming those actions were genuinely directed to the best interests of the corporation.

Inconcluding that independent actions could be maintained against the director and employees, Carthy J.A. for a unanimous Court stated: The consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations areresponsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company,always subject to the Said v. Butt exception. [para. 18] [15] We note parenthetically that the Said v. Butt exception originates from the decision which bearsits name, reported at [1920] 3 K.B. 497.

That exception holds that corporate directors and employees are not liable for inducing a breachof contract by their employer, so long as the breach was undertaken in good faith and for the protection of the employer’s legitimateinterests. (See Walsh v. Nicholls, 2004 NBCA 59, 273 N.B.R. (2d) 203 at para. 66). The exception does not apply to other recognizedheads of tortious wrong (see ADGA at pp. 4-5). [16] The Court in ADGA adopted the reasons of this Court in Sullivan v. Desrosiers (1986), (NB CA), 76 N.B.R. (2d) 271, [1986] N.B.J. No. 156 (C.A.) (QL), leave to appeal refused, [1987] S.C.C.A. No. 201 (QL).

In Sullivan the plaintiffs claimed their lands had been polluted by a manure lagoon and brought actions against the corporate defendantand the manager and principal employee, Mr. Sullivan. Hoyt J.A. stated: The question here is whether Mr. Sullivan, who was the manager and principal employee of the company that committed the nuisance,may be responsible along with the company. I see no reason why, because of his involvement in creating and maintaining the nuisance,Mr. Sullivan should not also be responsible. […] Nor am I attracted to the submission that Mr. Sullivan is protected by reason of the rule in Salomon v.

Salomon & Co., [1897] A.C. 22.The question here, as I have pointed out, is not whether Mr. Sullivan was acting on behalf of or even if he “was” the company, butwhether a legal barrier, here a company, can be erected between a person found to be a wrongdoer and an injured party thereby relievinghe wrongdoer of his liability.

In my opinion, once it is determined that a person breaches a duty owed to neighbouring landowners not tointerfere with their reasonable enjoyment of their property, liability may be imposed on him and he may not escape by saying that as wellas being a wrongdoer he is also a company manager or employee. [paras. 16-17] See also London Drugs Ltd. v. Kuehne & Nagel International Ltd., (SCC), [1992] 3 S.C.R. 299, [1992] S.C.J. No. 84(QL). [17] Two distinct principles have emerged from Salomon v. Salomon and Said v. Butt.

Tortiousconduct of directors is independently actionable, with the exception of inducing breach of contract between the corporation and a thirdparty. Even in contractual cases, an action can be maintained against the directors in the event of fraud, deceit, dishonesty or some otherconduct that brings into question the bona fides of their conduct. The auditors limit their claim to negligence. They have every right tocome before the courts for a determination of whether or not they are correct in asserting the directors’ negligence caused the CreditUnion’s losses. C.

Misapplication of the Contributory Negligence Act [18] The auditors plead the Contributory Negligence Act, R.S.N.B. 1973, c. C-19, s. 1(1) whichprovides as follows:

(1) Where by the fault of two or more persons damage or loss is caused to one or more of them, the liability to make good the damage or loss is in proportion to the degree in which each person was at fault but if, having regard to all the circumstances of the case, it is not possible to establish different degrees of fault, the liability shall be apportioned equally. 1

(1) Lorsqu’un dommage ou une perte ont été causés par la faute de deux personnes ou plus à l’une d’entre elles ou plus, la responsabilité de réparer ce dommage ou cette perte se partage entre elles proportionnellement à l’importance de leurs fautes respectives, mais si, compte tenu de toutes les circonstances de l’affaire, il n’est pas possible d’établir des différences d’importance entre leurs fautes, la responsabilité se partage entre elles à parts égales. [ 19 ] The auditors’ position is not complicated. They deny any negligence or breach of contract on their part.

However, if they are in any way responsible for the Credit Union’s losses, they say fault, at least in part, rests with the directors for their negligence in not following their (the auditors) recommendations, the recommendations of the Stabilization Board, and the requirements of the Credit Unions Act . This is a classic contributory negligence claim.

The motion judge, however, relying upon Piedra, which we have already opined has limited, if any, relevance to this dispute, curiously concluded as follows: Against this background the broad words of the Contributory Negligence Act cannot be interpreted as over ruling the common law that generally protects directors of corporations from personal liability. An individual director, officer or employee of a corporation in performing his or her duties honestly without committing a specific personal tort is not a “person” within the meaning of the Contributory Negligence Act .

He or she is only an agent of that corporation; the corporation is the “person” for the purposes of that Act . [para. 35] [ 20 ] In response to the motion judge’s observations we would offer the following. We know of no common law principle, other than the very limited application of Said v. Butt , which “generally protects directors of corporations from personal liability”. We would add that “person” as contemplated by the Contributory Negligence Act , includes corporate managers, directors and employees. The definition of “person” is not determined by the merit or lack thereof of the claim.

Even in situations where Said v. Butt applies, the wrongfully named defendants or third parties, as the case may be, are still “persons” who would need to bring a Rule 23 motion or make the argument at trial that they cannot at law be a “ person […] at fault”. III. Appeal from Decision on Costs [ 21 ] While much could be written about the motion judge’s award of solicitor-client costs against Ms. Dawe personally, we will exercise restraint and state that since we allowed the appeal on the motion to strike, the appeal regarding the costs becomes moot.

It is the auditors who are entitled to costs on the dismissal of the motion, which we would fix at $2,000. [ 22 ] We would add that, had we concluded the appeal on the motion decision should be dismissed, we would nevertheless have allowed the appeals from the decision to order solicitor-client costs and that Ms. Dawe personally pay them. In our view, there was simply no proper basis in law or on the facts of this case to order such costs. IV.

Costs on Appeal [ 23 ] We would award one set of costs on the two appeals to the appellant auditors against the third parties, jointly and severally, in the amount of $5,000. _______________________________ J. C. MARC RICHARD, J.A.

_______________________________ B. RICHARD BELL, J.A. _______________________________ KATHLEEN A. QUIGG, J.A.