In an earlier post, we discussed the trial decision in CHU de Québec-Université Laval v. Tree of Knowledge International. The Ontario Court of Appeal has now upheld that decision. The key takeaway is straightforward: corporate directors and officers can be personally liable if they personally take part in civil fraud.
The defendant, Michael Caridi, has asked the Supreme Court of Canada for leave to appeal to have the following questions addressed:
- When should directors and officers of corporations be held personally liable in tort?
- What is the correct test for recklessness in the context of civil fraud?
CHU de Québec-Université Laval (CHU) has filed its response. Baker McKenzie represented CHU at trial and before the Ontario Court of Appeal.
The story so far
CHU is one of Canada’s largest hospital networks. During the COVID-19 pandemic, it urgently needed personal protective equipment. Tree of Knowledge International Corp. and its U.S. subsidiary agreed to supply 3 million NIOSH-certified N95 masks for about US $14 million. Mr. Caridi, an officer and director of the company, told CHU that Tree of Knowledge could supply the required masks in two days if CHU paid the full price in advance. CHU paid, but the promised masks were not delivered. Instead, Mr. Caridi tried to provide a smaller quantity of KN95 masks. CHU rejected those masks and demanded its money back. When repayment did not occur, CHU sued Mr. Caridi and others for civil fraud, among other claims.
Civil fraud by recklessness as to the truth of the representations
The Trial Judge found that Mr. Caridi committed civil fraud. CHU proved that he made false statements, that CHU relied on those statements, and that Mr. Caridi was reckless about whether what he said was true.
On appeal, Mr. Caridi argued that the Trial Judge used too low a standard for recklessness in a civil fraud case.
The Court of Appeal rejected that argument. It held that there was “no doubt” Mr. Caridi acted recklessly when he represented that he could secure 3 million NIOSH-certified N95 masks for CHU when the contract was formed and in the following days, while requiring CHU to pay in advance. The Court pointed to several key facts:
- When the company agreed to supply the masks, Mr. Caridi had not actually sourced them and had no secured agreement to buy them.
- Mr. Caridi was aware that the masks to be delivered would not be NIOSH-certified N95 masks.
- Despite having no basis for doing so, Mr. Caridi made definitive, unqualified representations to CHU including claiming that he was “100% certain” the masks would be NIOSH-certified N95 masks.Mr. Caridi “intended to induce CHU to pay TOKI, regardless of whether TOKI could deliver the masks or not.”
- Most of CHU’s money was never returned. Mr. Caridi paid himself a substantial amount and sent large sums to unrelated third parties, while CHU received only quantities of worthless, non-medical-grade KN95 masks stamped non-medical use.
Fraud is a standalone basis for a director’s personal liability
The next question was whether Mr. Caridi could be personally responsible for the fraud, even though he acted through a corporation. The Trial Judge said yes. The Judge relied on the ADGA Systems International Ltd. v. Valcom Ltd. line of cases, which allows personal liability where a corporate representative’s own conduct is tortious in and of itself or exhibited a separate identity from the corporation. The Trial Judge found Mr. Caridi’s conduct fell squarely within the circumstances in which the conduct exhibited a separate identity or interest from that of the corporation. The evidence showed that Mr. Caridi stood to personally profit from the misrepresentations (he admitted that he was to share 50% of the profits with the corporate defendants) and he had directed the money to a bank account of the wholly-owned U.S. subsidiary that he controlled. As such, Mr. Caridi was acting in a personal capacity as well as in his capacity as the sole director and officer when he made the fraudulent misrepresentations.
On appeal, Mr. Caridi argued that the Trial Judge was wrong to impose personal liability on him. He said the law was unclear about when a director or officer can be personally responsible for wrongdoing carried out in a corporate role and required clarification.
The Court of Appeal disagreed. It held that the law is clear: a director or officer who personally participates in fraud can be personally liable for that fraud. The Court explained that this does not depend on technical labels such as whether the conduct was “independently tortious” or showed a “separate identity or interest.” Direct participation in fraud is enough.
The Court said this conclusion fits with long-standing law. Courts have generally been cautious about making directors and officers personally liable for corporate wrongdoing. But fraud, deceit, dishonesty, and similar conduct have always been different. In its 1995 decision, ScotiaMcLeod Inc. v. Peoples Jewellers Ltd., the Court of Appeal explained that in “[i]n the absence of findings of fraud, deceit, dishonesty or want of authority on the part of employees or officers”, cases where an officer or director of a corporation will be held personally liable are rare.
The Court also noted that this approach is consistent with decisions in other jurisdictions, including British Columbia and the United Kingdom. In XY, LLC v. Zhu, the British Columbia Court of Appeal has similarly concluded that “[i]n any event it is clear that fraud or fraudulent conduct has historically fallen into an established category in which personal liability has been imposed on agents and employees.” And in Contex Drouzhba Ltd. v. Wiseman, the England and Wales Court of Appeal held that “[e]ven if the company would be liable for the deceit carried out by its director, the director has a personal liability for his own fraud.”
Why this matters
This decision is a reminder that the protection of a corporation has limits. Directors, officers, and senior employees should be careful when making statements to customers, suppliers, or business partners, especially where those statements are used to secure payment or close a deal. A director or officer who makes confident promises without a proper basis may face personal exposure if those promises turn out to be false.