by: Sylvie Lalonde
In the recent case of Ontario Psychological Association v. Mardonet et al. (2016), 132 O.R. (3d) 750 the Court was asked to consider a peculiar argument that, if successful, would have yielded an absurd result.
The Ontario Psychological Association (the “OPA”) is a not-for-profit corporation and voluntary professional organization representing psychology in Ontario. Ms. Charlotte Mardonet (“Mardonet”) was an employee of the OPA, whose responsibilities included the day-to-day administration of the finances and money of the OPA. The OPA terminated Mardonet’s employment on the basis that for a period of approximately ten years, she “abused her role with the [OPA] and engaged in a scheme to misappropriate in excess of 1.6 million dollars or more…” The OPA sued Mardonet for damages for misappropriation of funds, but Mardonet’s statement of defence included a counterclaim against the OPA and its directors and officers on the basis that they owed her “both a duty of care and a fiduciary duty which they breached as a result of their failure to provide her with the supervision, management, support and guidance that was part of their responsibility.” Mardonet’s crossclaim sought full indemnity or contribution from the OPA and its directors and officers in the event she was found in any way liable to the OPA for the amounts found due by her to the OPA.
The OPA brought a motion to strike out Mardonet’s counterclaim insofar as it claimed indemnity and contribution from the OPA and its directors and officers. To succeed, the OPA needed to demonstrate that the counterclaim had no reasonable prospect of success. In adjudicating the issue, the Court stated that the question was “whether there is any reasonable prospect that the [directors and officers] owe a duty, either a fiduciary duty or a duty of care to [Mardonet] such that, to the extent that she misappropriated funds of the [OPA], they would be required to indemnify her or contribute to the liability she would bear. […] In short, do the officers and directors owe the employees a duty to protect those employees from their own wrongdoing and failings?” In Justice Lederer’s opinion, the answer is clear: “there is no such duty that can be applicable to the facts of this case.” The OPA’s motion was granted.
In its reasons, the Court reminded us that the fiduciary duties of directors and officers require them to act honestly and in good faith with a view to the best interests of the corporation. Justice Lederer stated that a fiduciary duty is essentially a duty of loyalty, which is owed to the corporation. While the Court acknowledged that, in acting with a view to the best interests of the corporation, directors and officers may consider the interests of other stakeholders, such as shareholders, members employees or consumers, it was not prepared to conclude that there exists a duty of loyalty to employees (independent of that directed to the corporation), particularly employees who have wilfully caused damage the corporation. Referencing the circumstances in which a director or officer may owe a duty of care to any employee Justice Lederer stated: “This might arise where the director or officer was directly implicated and personally involved in decisions or actions which impacted on the safety or treatment of the employee in the workplace.” But, unfortunately for Mardonet, the Court found that, in the circumstances, there could not exist any legitimate interest of hers that would give rise to such a duty. The Court’s reasons go on to illustrate the absurdity of Mardonet’s claim: “If Charlotte (Carla) Mardonet defrauded or was negligent or acted in breach of contract or trust she is the one who must bear the responsibility, not the officers or directors of the company. As a matter of policy, internal to the relationship, there is simply no basis to say that an officer and director should be duty-bound to save harmless an employee who has defrauded or otherwise improperly made off with money belonging to the corporation. To argue otherwise would allow the employee to benefit from his or her own wrongdoing.”
In its concluding comments, the Court stated that there is another policy reason, external to the relationship between the parties, which confirms that no such duty should be recognized. The law clearly establishes that the duty of directors and officers is to the corporation. “It is not difficult to see that the recognition of a duty of care to protect employees from their own wrongdoing could work to the detriment of the corporation. Apart from everything else, it would leave directors and officers searching out and examining the actions of all manner of employees to ensure none of them were defrauding the company or negligently misusing its assets. It is hard to picture this being anything other than disruptive to the corporation, its organization and operations. Moreover, it is doubtful that with this duty recognized, many people would want to take on the responsibility and accept the appointment as an officer or a director.”