A Fiduciary Obligation Does Not (Necessarily) a Fiduciary Make
By Joel Secter
Regular readers may recall the article we wrote (click here) on the topic of officer liability. There we commented on circumstances in which officers of corporations under the Canada Not-for-profit Corporations Act (CNCA) (whether continued to it or incorporated there) will be exposed to personal liability. Not long after that piece was written, an Executive Director of a corporation considering continuing to the CNCA who is an employee and not an officer in accordance with the corporation’s by-laws, asked us if she would owe a fiduciary duty to the corporation under the CNCA. On reflection, we concluded that the new officer provisions in the CNCA create a statutory framework wherein employees could be held liable for a breach of the same duties that are applicable to directors of those corporations. We left, for the moment, the question as to whether these duties were “fiduciary” or not.
The CNCA defines officer as follows:
“officer” means an individual appointed as an officer [by the directors], the chairperson of the board of directors, the president, a vice-president, the secretary, the treasurer, the comptroller, the general counsel, the general manager or a managing director of a corporation, or any other individual who performs functions for a corporation similar to those normally performed by an individual occupying any of those offices.
What is new under the CNCA is that the legislation defines officer and includes personnel such as comptroller, general counsel, general manager, managing director or any other individual who performs functions similar to those mentioned. The obvious implication is that a whole range of professionals, managers and administrators employed by the corporation could be held accountable as officers, regardless whether those individuals were appointed in accordance with the by-laws or even identified themselves as such.
This may be unsettling to people working in the non-profit sector who learn that officer liability could arise from section 148(1) of the CNCA, which states that every officer of a corporation in exercising their powers and discharging their duties shall:
(a) act honestly and in good faith with a view to the best interests of the corporation; and
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
The first duty has been referred to as a ‘fiduciary duty’; however, the Supreme Court of Canada, in a different context, has stated that, “it is better described as the ‘duty of loyalty'”.[1] This duty requires officers to act honestly and in good faith with a view to the best interests of the corporation. The second duty is commonly referred to as the “duty of care”. Generally speaking, it imposes a legal obligation upon officers to be diligent in supervising and managing the corporation’s affairs.
This brings us to the word ‘fiduciary’. A fiduciary is a person having a duty, created by his or her undertaking, to act primarily for another person’s benefit. The main practical implication is that it is arguably much easier to bring an action for breach of fiduciary duty than, for example, fraud. In addition equity protections are only available to complainants to whom a fiduciary duty is owed. Therefore, what is at stake is considerable when you consider (a) how broadly the CNCA defines officer and (b) how easily a complainant can bring an action on behalf of the corporation or themselves.
The point we made to the Executive Director is that while the CNCA imposes a duty of loyalty on officers, and this duty has been referred to as a fiduciary obligation, this does not mean that the CNCA treats officers as fiduciaries; nor does it mean that they are fiduciaries by virtue of their employment with the corporation. In other words, a fiduciary obligation does not (necessarily) a fiduciary make.
A few central principles from the case law are instructive. First, notwithstanding that there are certain established fiduciary relationships – namely, agent, trustee, partner, director – the categories of fiduciary are not considered closed.[2] Second, the Supreme Court of Canada has held that officers of business corporations are subject to the same fiduciary duties as directors where they were top management and not mere employees.[3] Third, it is fundamental to the existence of any fiduciary obligation that the fiduciary has a discretionary power to affect the corporation’s legal or practical interests.[4] While one can conclude from the above that it is open for Canadian courts to find that officers of non-profit corporations owe a fiduciary obligation to the corporation, it would be unprecedented for them to do so.
While this may all seem academic now, it is only a matter of time before such a case is put to the legal test. Until clarified by the courts, whether officers owe a fiduciary duty to the corporation remains a question and not a conclusion. Therefore, senior managers and boards of non-profits should be mindful that the law is unsettled and act accordingly.
[1] Peoples Department Stores Inc. (Trustee of) v. Wise 2004 SCC 68.
[2] Guerin v. The Queen, [1984] 2 S.C.R. 335.
[3] Canadian Aero Service Ltd. v O’Malley, [1974] S.C.R. 592.
[4] Frame v. Smith, [1987] 2 S.C.R. 99.