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On February 2, 2006, the Quebec Court of Appeal rendered an interesting judgement involving directors’ liabilities in the case of Johnson and Marcil v. André Arthur et al (500-09-012808-028), a lawsuit for slander. HIGHLIGHTS • A director can be held liable for the faulty conduct of employees if he or she does not take reasonable measures to prevent it • A director cannot ignore clearly identified risks of damage to third parties • A director may be held extra-contractually liable for faulty decisions made in the course of carrying out his or her duties 1. The facts The parties were described as follows by Judge Rochette:[Translation] “The appellants and defendants are André Arthur, his employers Métromédia C.M.R. Montréal inc. (CKVL) and Cogéco Radio-Télévision inc. (CJMF), and the directors of those two companies. The respondents and plaintiffs are Daniel Johnson, the former premier, and his spouse, Suzanne Marcil.“The comments of the new independent member of Parliament, André Arthur, concerned, among other things, the alleged involvement of Daniel Johnson in the granting of subsidies by the Government of Quebec to the ski resort owned by Les Entreprises Stoneham inc., of which Marc Blondeau, the former husband of Suzanne Marcil, was the principal shareholder. 2. The conclusions of the courts The Superior Court and the Court of Appeal both found that in fact Daniel Johnson did not intervene personally in the matter of subsidies to the Stoneham ski resort. The Court of Appeal concluded that the defendants held liable by Judge Carole Julien, the trial judge, namely André Arthur, his two employers, and the directors of Cogéco, were indeed liable. Both the Court of Appeal and Judge Julien exonerated the directors of Métromédia. 3. Liability of the directors of Cogéco The decision to hold the directors of Cogéco liable was based on their extra-contractual fault. The following extracts from the Court of Appeal’s decision written by Judge Rochette clearly and succinctly set out the reasons behind the decision to hold them liable. [Translation] ”[92] Article 1457 CCQ is of broad scope and it has been given an extensive and inclusive meaning. The expression «every person» found therein covers corporate directors and officers. Thus, a director may personally incur extra-contractual liability for faults committed toward third parties, particularly when it is shown that the decision-making was in itself faulty. [93] In this case, the appellants have not demonstrated to us a manifest and decisive error in the conclusion of the trial judge that the directors of Cogéco should be held to have committed an intentional fault. [94] The directors, in their thoughts, did not attach much importance to the notorious danger represented by the style of André Arthur to the privacy of people on whom he would eventually set his sights and the damage to their reputations that could ensue. The hiring of André Arthur was discussed by them and they obviously took on the risk represented by the radio show host. [95] Also, they were informed of the statements attacking the integrity and reputations of the respondents and did not react to have such statements corrected, even after the respondents sent a demand letter. [96] Obviously, the very «encouraging» poll results clouded their minds. Even the dismissal of André Arthur by Métromédia in June 1998, though it had been associated in this venture with Cogéco since the fall of 1997, was not the subject of questions, comments or reflection. “The Superior Court judge even described the behaviour of the directors of Cogéco as wilful blindness. 4. Basis for exonerating the directors of Métromédia from liability The Court of Appeal did not expressly address the issue of the liability of the Métromédia directors and simply maintained the conclusion of the trial judge in this respect. The only indication given to us by the Court of Appeal, other than its confirmation of the judgement of first instance, was the reference to the fact that Métromédia had dismissed André Arthur (see paragraph 96 cited above). Judge Carole Julien seems to have given a certain importance to the fact that the directors of Métromédia had adopted a policy or code of conduct concerning the behaviour of the radio show hosts on the air whereas the directors of Cogéco had not done so. 5. Context In Peoples Department Stores Inc. v. Wise ([2004] 3 S.C.R.) the Supreme Court of Canada held that a director’s duty of loyalty is owed to the entity of which he is a director whereas his duty of diligence can be owed to a broader range of persons. The case of Johnson and Marcil v. Arthur et al (S.C. 500-05-042565-984 - REJB 2002-34413) has, to a certain extent, provided an example of a failure to fulfil the duty of diligence. Decisions both in the United States and elsewhere in Canada have held directors liable when they have not investigated information or complaints of illegal conduct brought to their attention and taken corrective or preventive measures1. Note also that in civil law faults of omission (not acting, not investigating, etc) are clearly recognized in cases involving allegations of complicity or contributory fault while in common law such a fault is not as readily recognized. 6. Certain precautions available to directors Based on what can be understood from the judgments of both the Superior Court and the Court of Appeal, there are certain precautions that directors can take and which may protect them against potential liability: a. directors should adopt policies and codes of ethics to control the activities of the company and the behaviour of its employees and officers; and b. directors cannot ignore information brought to their attention in the form of complaints or indications of risk and should investigate the same and take corrective or preventive measures. We invite you to read our November 2005 newsletter entitled «Corporate Directors: Suggested Precautions» which you can access from our web site, or contact the author’s assistant to obtain a paper copy. WARNING The whole or part of this text may not be used or reproduced without the express autorization of Lavery, de Billy or without making reference to its source.

 

Footnotes: 1. Examples: McCall v. Schott, 239 F. 3d 808; 2001 U.S. App. LEXIS 2064; 2001 FED App. 0040p (6th Cir.) Nos. 99-6370/99-6387; Omnicare Inc. v. NCS Healthcare Inc., 818 A. 2d 914; 2003 Del. LEXIS 195, No. 605, 2002 - No. 649, 2002 CONSOLIDATED.