Canadian Corporate Law, Veil Piercing

Canadian Corporate Law, Veil-Piercing, and the Private Law Model Corporation
Author(s): Jason W. Neyers

Source: The University of Toronto Law Journal, Vol. 50, No. 2 (Spring, 2000), pp. 173-240
Published by: University of Toronto Press
Stable URL: http://www.jstor.org/stable/825991
Accessed: 17-02-2016 09:16 UTC
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Jason W. Neyers*
CANADIAN CORPORATE LAW,

VEIL-PIERCING, AND THE
PRIVATE LAW MODEL CORPORATIONt
TABLEOF CONTENTS
Introduction
I CurrentDoctrine is Incoherent and Confusing
A Incoherence Defined
B The Failingsof PresentDoctrine
II A PrivateLaw Model of the Corporation
A Limited Liability
1. The Shareholder Contract ('s' Contract)
2. The Directors'Contract ('D' Contract)
3. The Position of ContractualCreditorsof the Corporate
Patrimony
4. The Positionof Tort Creditorsof the Corporate Patrimony
B EffectiveLegal Personality
C Free Transferability
of Shares
D Perpetual Existence & Separation of Ownershipand Control
E Questions and Objections Relatingto the PrivateLaw Model
1. General Responses
2. SpecificResponse to H.L.A.Hart
3. Differentiating
the PrivateLaw Model fromOther
ContractualModels
III The Veil-piercingCases Re-examined
A LegislativeInterventions
B StatutoryInterpretation
C Fraud or 'Mere Facade'
D Agency
E Tort
F Veil-piercingis not Exceptional
Conclusion
174
176
176
179
189
191
191
192
194
195
200
201
201
202
202
208
212
215
216
217
219
225
227
237
238
* D. Phil.candidate(Oxon.).
underthesupervision
ofProfessor
t An earlierversionofthisarticlewaswritten
D.D.
whomI wouldliketo thankforhisinvaluableguidanceand criticalreviews
Prentice,
without
whichthisworkwouldnothavebeen possible.I also gratefully
acknowledge
thedebtowedtomywifeRebeccaNeyersforherhelpfuleditingand moralsupport.
I wouldliketothankProfessor
DavidStevens,
TomaszSojka,and themembers
Finally,
oftheOxfordPrivate
LawReadingGroupfortheirveryhelpfulcomments
on earlier
drafts
ofthisproject.Anyerrorsandomissions
in thepaper,however,
remainthesole
oftheauthor.
responsibility
(2000), 50 UNIVERSITYOF TORONTO LAWJOURNAL173
174 UNIVERSITYOF TORONTO LAWJOURNAL
You reThinking like a lawyerinvolvedbeing suspicious and distrustful.

evaluated statements,inferredfromsilences, looked for loopholes and
but take a statementat face value. So on
ambiguities.You did everything
one hand you believed nothing.And on the other,forthe sake of logical
consistency,and to preservelong-establishedrules,you would accept the
most ridiculous fictions- that a corporation was a person, that an
apartmenttenantwas rentingland and not a dwelling....'
Introduction
The question of the 'true nature' of the corporate legal person and its
personalityhas been one of the most troublesomeand time-consuming
questions everpondered byphilosophers,sociologists,economists,historians, linguists,and jurists.2Examinationsof thisproblem have lead to
radically different,and seeminglymutuallyexclusive, answers to this
question. Once it is realized, however,thatthereare a multitudeof distinctiveyetequallyvalidwaysof lookingat anyphenomenon, the quest to
findand defend 'the one true' answerbecomes unnecessary.Instead,one
comes to realize thattherecan be anynumber of 'true' answersso long as
the dictates and fundamentalassumptionsof a given discipline are adhered to. Thus, itis consistentto saythat,accordingto economics,thereis
no such thing as corporate personalitysince the 'true' nature of the
while also stating,thataccording to
corporation is a nexus of contracts,3
sociologyor social philosophy,corporatepersonalityis 'real' and reflects
the willof the group.4Likewise,one can make linguisticargumentsto say
thatthe use of the word 'person' to denote an inanimatepatrimony5is a
1 S. Thurow, OneL (New York: Penguin, 1977) at 93.
2 ProfessorWolffonce argued thatall continentallegal scholars could be broken into
one of two camps: those who had writtenabout corporatepersonalityand those that
had not yet done so, M. Wolff,'On the Nature of Legal Persons' (1938) 54 Law Q.
Rev. 494 at 494. On the differenttheories of legal personality,see R.W.M. Dias,
5th ed. (London: Butterworths,
1985) at 253, ff.
Jurisrudence,
3 While the literatureusing this paradigm is too vast to list, good summaries of this
Law (New York: Oxford
approach can be found in R. Romano, FoundationsofComporate
Structure
and Operation
UniversityPress, 1997); B.R. Cheffins,CompanyLaw: Theory,
(Oxford: Clarendon Press,1997).
4 See,forexample,
M.J.Phillips,'ReappraisingtheReal EntityTheoryofthe Corporation'
(1994) 21 Florida State Univ. L. Rev. 1061.
5 Patrimonyis a civilianexpression forthe totalityof existingand potentialassets (and
liabilities) of a person, or specific fund, that are capable of pecuniary evaluation.
While a patrimonyis attached to all people, in modern civiliandoctrineone mayalso
be dedicated to a purpose as a patrimonie
see Arts.1256 & 1261 Civil Code
d'affection,
of Quebec [hereinafterC.C.Q.].
CANADIANCORPORATELAW 175
fictionaccording to common usage" or to argue thatspeaking of groups

as if theywere natural persons is a verynatural phenomenon.7 While
these argumentsare of general interest,and the answers reached by
these various non-legal participantsin the debate have validity.in their
own disciplines,theyreallyhave verylittleto say to the lawyerabout the
legalprincipleof the corporationas a separate person.8
In seeking to analyze the 'separate entity'principle,this paper will
employ a purely internal private law perspective.Thus, it makes no
imperialisticclaimsthatitsanswersare the one 'truth'thattrumpsall answersreached in other disciplines.Its onlyclaim willbe thatthe answers
providedforma coherentwayto examine thisissue froma legal perspective. In order to reach this conclusion, the paper is divided into three
main sections.In PartI, thispaper willassertthatCanadian corporatelaw
is incoherentas a resultofitsorganizationaround a separate legal person
doctrinethat:firstis directlycontradictedbythe bodyof law dealing with
piercing the corporate veil; and second fails to provide a unifying
explanation of thatwhichit claims to be an organizingprinciple.
In Part II, this paper will show that the traditionalformulationof a
corporation as a legal person is also unnecessary.This will be accomplished through the formulationof a 'privatelaw model' corporation
constructed with nothing more than the basic legal conceptions of
natural persons, property,tort,contract,and unjust enrichment.It will
be argued that this model is capable both of mimickingthe most basic
structuralformof modern Canadian corporationstatutesand of explain6 See Trustees
17 U.S. 518 (1819) at 636 perMarshallC.J.
ofDartmouth
Collegev.Woodward,
('A corporation is an artificialbeing, invisible,intangible, and existing only in
contemplationof law.').
7 See S.A. Schane, 'The Corporation Is A Person: The Language Of A Legal Fiction'
(1987) 61 Tul. L. Rev. 563.
8 Forexample,
the fictiontheorycorrectlysupposes thatfroman everydaylinguisticpoint
of view 'the short-handformulation"corporate person" cannot be literallytrue.' D.
Stevens,'The Regulation of Takeovers and the Idea of the Corporation' [1994/95]
Meredith
Lectures
372 at 419 [hereinafterafter'Regulation']. It is not, however,a legal
theory about the corporation, as this assertion tells us nothing about how the
relationshipsand legal issues surroundingcorporate law should be solved. Similarly,
the realistversionis also true- people do join togetherto formgroups. These groups
oftentake on an enduring'culture' and when immersedin thesegroups people often
behave differently
as a result,see Schane, supra note 7 at 567. Yet, the realistversionis
'legally irrelevantsince the existence of a group identitysaysnothingabout the legal
formof the identity,''Regulation' at 419. Whatwe are concerned withas lawyersis the
principle of legal personalityand its recognition as legal doctrine, not 'social,
Law in Canada: The
psychological,or erotic personality.'See B. Welling, Corprrate
2d ed. (Toronto: Butterworths,
1991) at 80 [hereinafterCorporate
Governing
Principles,
Law].
OFTORONTOLAWJOURNAL
176 UNIVERSITY
ing all the traditionalattributesof the corporation,viz,limitedliability,
effectivelegal personality,perpetual existence, free transferability
of
shares,and separationof ownershipand control.!"
In Part III, this paper will then test the private law model of the
corporation to see if it provides a more coherent way to understand
difficultlegal situations.The testingground willbe the quagmire of law
thatis formedby the veil-piercingcases. The argumentof Part IV is that
when the corporationis properlyconceptualized, the riddle of the veilpiercing cases is easilysolved as simplythe proper application of common law principlesto the corporation.
I Current
is incoherent
and confusing
doctrine
A. INCOHERENCEDEFINED
In order to go about demonstratingthat Canadian corporate law is

incoherent and confusing,one must indicate in what sense the term
'incoherence' is being utilized. For the purpose of this paper, the
followingprivate law definitionof coherence will be employed. Under
thisview,incoherence can manifestitselfin twowaysin anylegal system.
The firstand most common manifestationoccurs when two doctrines
directlyand logicallycontradictone another in one unifiedarea of law.
For example, tortlaw is incoherentin thissense so long as the principle
that'one is responsibleforall reasonablyforeseeableharm' is seen to be
for 'pure' economic loss. While thisis the
contradictedby non-recovery
form
of
thereis also a second manifestation.This
incoherence,
primary
more subtle formoccurs when a self-appointedfoundational principle
fails to explain areas which are central to its experience and which by
common understandingare to be included in that body of law. For
example, a theoreticalunderstandingof contractlawwould be incoherent, in thissecond sense, ifit could not explain and integrate'expectation' damages into its overalljustificationof contract. In sum, to be
coherent a body of law mustconsistof doctrinesthat'exemplifya single
theme' and constitutea unitarywhole, rather than merelybeing 'an
aggregate of conceptually disjunct or inconsistentelements that ...
9 These are an amalgam of the traditional attributeslisted in P.L. Davies (with
contributionfromD.D. Prentice), GowervPrinciplesOfModernCompanyLaw, 6th ed.
(London: Sweet & Maxwell,1997) at c. 5. [hereinafterGower'];R.C. Clark, Corporate
Law (Boston: Little Brown, 1986) at s.1.1(2); H.A.J.Ford & R.P. Austin,Principlesqf
Law (Sydney:Butterworths,1995) at 86-7 [hereinafterPrinciples];L.E.
Corporations
Ribstein,'Limited Liabilityand Theories of the Corporation' 50 Mar. L. Rev. 80 at 89
[hereinafter'LimitedLiability'].
CANADIANCORPORATELAW
177
happen to be juxtaposed.'"" The forthcomingargument will be that

Canadian corporate law is incoherentbecause itsorganizingprincipleis
and fails to explain the totalityof the law
both contradictedarbitrarily
to
in
a
unified
fashion.
relating corporations
The next importanttask,especiallyto convince the pragmaticlawyer,
is to answerthe question: 'Our currentunderstandingmaybe inelegant
and technical, but it gets the job done in most cases, so what does it
matterif corporate law is incoherent?'In other words,whydoes coherence matter?While one could writea whole manuscriptaddressingthis
question," a shortanswerwould take the followingform.If a body of law
is coherent,one can readilydetermineand comprehenditsstructureand
rules. One can identifythe core formor principle,as well as: how this
principle is applied in secondarydoctrines;how these doctrinesinterrelate withone another; and how theyare furtherrefinedinto thirdlevel
rulesdesigned forspecificcircumstances."Thus, the quest forcoherence
forces one to formulatesecondarydoctrinesand rules so that theyare
ultimatelyreferableto that pre-eminentprinciple. In doing so, coherence renders the law both intelligible
and accessible.13
Since a coherent
systemis intelligible,people can also be reasonably sure when their
actionswillcontravenethe law,makeplausible argumentson how the law
should develop to meet futuredemands, and therebystructuretheir
relations with others in a more certain fashion. Thus, coherence also
value. Beyond these virtues,coherence also servesto
providespredictive
the
justify
operation of law with the public. Since rules are coherently
related to 'principle' (and courtsjustifytheirdecisions in writtenjudgementsforall to see), persons involvedin disputescan see thata decision
was rendered for legal reasons and not because of sympathy,political
expedience, subjectivemoral assumption,or arbitrarymechanism (e.g.,
value and
flippinga coin in despair)." Thus, coherence has justificatory
demonstratesthatthe state'simpositionof coercion isjustifiedon some
10 E.J.Weinrib,'Legal Formalism:On the ImmanentRationalityof the Law' (1988) 97
Yale L.J.949 at 968-9.
11 See E.J.Weinrib,TheIdea ofPrivateLaw (Cambridge: Harvard UniversityPress,1995)
[hereinafterPrivateLaw].
12 This is largelythe structureof the C.C.Q., Book Five,whichstartswithan organizing
principleof Obligations,then proceeds to define itsmanifestationsin Contract,Civil
Responsibility,and Unjustified Enrichment; how these doctrines relate to one
another; and then finallythe special rules forNominate Contractsand Torts.
13 For evidence, compare the organization,language, and lengthof the C.C.Q., which
regulates all of privatelaw with the CompaniesAct (U.K.), 1985, c. 6. [hereinafter
U.K.C.A.], which attemptsto regulateonlycorporations.
14 D. Stevens, 'Restitution,Property,and the Cause of Action in Unjust Enrichment:
GettingBywithFewerThings' (1989) 39 U.T.L.J. 258, 270.
plane higher than brute force.Finally,because the quest forcoherence

and the process ofjustificationseriously,it
takes principle,intelligibility,
helps to ensure that there is an internalchange mechanism withinthe
law itself.Thus, even on an internalunderstandingof the law, we can
legitimatelyargue thatsome cases or doctrinesare wrong- even ancient
rules that'have spawnedextensiveand ramifiedjurisprudence' - because
they 'do not adequately reflect'the higher principle to which theyare
said to cohere.'" Thus, coherence ensures that workingwithinthe law
does not come to equal accepting'the entirecorpus of holdingsas ifthey
were factsof nature.'"' Coherence, therefore,also has a corrective
value.
The truevirtuesof coherence, however,are more readilydemonstrated
when it is absent froma legal system.
Withoutcoherence, a bodyof law becomes increasinglytechnicaland
confusingas it retreatsinto conventionalismand arbitrarydistinctionto
justifythe increasinglydisparate holdings of the cases. With this dissonance, the lawyercan no longer properlyadvise his or her clients as to
the probable outcome of litigationor how to order their affairs.Thus,
'testing'litigationincreases,as do claimsofmalpracticeor misrepresentation.Judgesexasperatedwiththeincreasingcomplexityand incoherence
of the cases either come to strange conclusions that run counter to
intuition but conform to the 'law' as conventionallyunderstood it;17
reinterpretclear language withstatementslike 'although the lawsaysx, it
reallymeans Y or sometimesZ';18 or resortto 'policy,' 'Equity' or overtly
historicist"argumentstojustifya remedygivento thosewhom theythink
are deserving.2"Soon litigants,litigators,and commentatorslose faithin
thatbody of law's abilityto properlyjustify
itsoutcomes,oftenretreating
into other disciplinesforunderstanding.21
Then, finally,because the law
shows no sign of correctingitself,legislationis passed to remedy the
worst failings of the system,often by giving the judiciary even wider
remedies designed to do 'justice' in the circumstances.22
Unfortunately,
15
16
17
18
19
PrivateLaw, supra note 11 at 13.

Ibid. at 13.
See the discussionof poison pillssurroundingnote 65, below.
See discussionof 'best interestsof the corporation' surroundingnote 58, below.
This is the viewthata rule can be set aside withoutan examinationof itsmeritsmerely
because itwas historicallyconditioned; forexample,
thatthe doctrineof consideration
should be rejected because it is said to represent a nineteenth-century
laisserfaire
mentality.
20 See discussionof the 'corporate approach' tortcases in Part III (E), which are said to
protectthe policyof limitedliability.
21 Such as the hugelypopular 'law and economics' approach.
22 Forexample,
the Canadian oppression remedy:'the broadest,mostcomprehensiveand
mostopen-ended shareholderremedyin the common lawworld.It is unprecedented
CANADIAN CORPORATE LAW 179
as the pragmatic lawyerwill have realized, this state of affairslargely

describes the present state of Canadian corporate law. What he or she
mightnot have realized is that much of this discord is directlyattributable to corporate law's incoherence, ratherthan to its increasing complexity.Thus, when coherence is removed fromthe law, one can more
readilysee whyitsabsence should concern the pragmaticlawyeras much
as it does the academic.
B. THE FAILINGS OF PRESENT DOCTRINE
Open any major corporatelaw textbookand one will be inundated with

claims to the effectthatthe principlerecognized in Salomonv. A. Salomon
& Co. Ltd.,2 and codified in the Canadian BusinessCorporations
Act,s.
15(1)24 - that the corporation is a legal person distinctfromits shareholders, directors,and any other legal person - is the central and
foundationalprincipalof corporate law.25Furthermore,that thisprinciple is justified,necessary,and should continue to formsuch a basis is
rarelyquestioned.2"As Lord Templeman claims, it is the 'unyielding
rock'27on which corporate law is constructed.28While this traditional
'black letter'approach has survivedformore than 100 years,it 'is unwise,
however,to infersuccess fromsurvival.What is more importantis that
the principlecan be shown... to be inherentlysound.'2" This is preciously
where the problemwithcorporatepersonalitylies foran examination of
thisprinciplerevealsthatit rendersCanadian corporate law incoherent.
Clearly,Canadian corporatelaw is incoherentin the firstsense due to
the factthatthe separateentityprincipleis directlycontradictedbyother
23
24
25
26
27
28
29
in its scope.' See 820099 OntarioInc. v. Harold BallardLtd. (1991), 3 B.L.R. (2d) 123
(Ont. Gen. Div.) at 179.
[1897] A.C. 22 (H.L.) [hereinafterSalomonv. Salomon].
R.S.C. 1985, c. C-44 [hereinafterC.B.C.A.]. See also OntarioBusinessCorqorations
Act,
R.S.O. 1990, c. B.16. at s.15 [hereinafterO.B.C.A.].
Law, supra note 8 at c. 3; H. Sutherland,Fraser&
supra note 9 at 77; Coirorate
Gower%',
StewartCompanyLaw of Canada, 6th ed. (Scarborough, ON: Carswell, 1993) at 17
[hereinafterFraser].
As R. Grantham& C. Rickett,'The Bookmaker'sLegacy to Company Law Doctrine' in
in the20thCentury,
R. Grantham& C. Rickett,eds., (Oxford, Hart
Personality
Corporate
Publishing,1998) 1 at 1 [hereinafter'Bookmaker'] claim: 'The centuryold decision
of the House of Lords in Salomonv. Salomon& Co. Ltd. is probably the most cited
companylaw case in thejurisdictionsof the Commonwealth.The case is creditedwith
having articulatedthe founding propositionsof company law, and it is accordingly
treatedbyjudges and academics alike witha reverenceborderingon the religious.'
L. Templeman, 'FortyYears On' (1990) 11 Co. Law 10.
See also L.S. Sealy, Casesand Materialsin Company
Law, 6th ed. (London: Butterworths,
1996) at 54 (described as a cornerstone).
'Bookmaker,' supra note 26 at 7.
common law doctrine relatingto the corporation.For evidence of this,

one need simplyexamine anyjudgement wheresharp practiceis alleged
or any major scholarlyworkon the subject.No sooner has it been stated
thatthe corporationis a legal person distinctfromitsshareholdersthan
courts and academic writersallow that legal personalityshould sometimes be disregarded.30How can the 'legal person doctrine' that is so
centralto corporatelaw in one sentence be disregardedso casuallyin the
next?Both propositionscannot be true.Somethingcannot both 'be' and
'not be.' This 'verysingular contradiction' is logicallyimpossible."' As
Lord Halsburyclaimed in Salomon'scase itself:'Eithera limitedcompany
was a legal entityor it was not.'32 Until thiscontradictionat the heart of
corporate law is explained in some principledfashion,or reliance upon
the legal person doctrine is discontinued,Canadian corporate law will
remain radicallyincoherent.
This area of conflictand incoherence becomes even more problematic when the veil-piercingdoctrinesare examined more closely. Such
scrutinyrevealsthatthe bodyof doctrinethatthreatensthe coherence of
corporatelaw is itselffarfromcoherent.The firstsignof thisis thatthere
is very little agreement as to what, in fact, constitutespiercing the
corporateveil.33Is lookingat the actionsofshareholdersin a corporation
veil-piercing?Some argue yes,34othersno.35Is looking at the actions of
directorsveil-piercing?
Again,similaryes"6and no answers.37The second
the number of
problematicsign is thatthere is no agreementas to either
categoriesallowingthe courts to pierce the corporateveil; the doctrinal
requirementsnecessaryforeach of the categories;or whichcases exem30 The phenomenon is so widespread thatone hesitatesto cite anyone in particular,but
see NedcoLtd. v. Clark(1973), 43 D.L.R. (3d) 714 (Sask. C.A.) [hereinafterNedco]at
721 (Salomonprinciple is fundamentalbut 'there are some cases in which the court
can and should liftthe corporate veil') and R.R. Pennington,CompanyLaw, 7th ed.
(London: Butterworths,
1995) at c. 2.
31 Corporate
Law, supra note 8 at 126.
32 Salomonv. Salomon,supra note 23 at 31.
33 R. Flannigan, 'Corporations Controlled By Shareholders: Principals, Agents Or
Servants?'(1986) 51 Sask. L. Rev. 23 at 25 [hereinafter'Agents'] and M.A. Pickering,
'The Company as a Separate Legal Entity'(1968) 31 M.L.R. 481 at 483.
34 S. Ottolenghi,'From Peeping Behind The CorporateVeil,To IgnoringIt Completely'
(1990) 53 M.L.R. 338.
35 D. Goddard, 'Corporate Personality- Limited Recourse and its Limits,'in Corporate
Personalityin the 20th Century,R. Grantham & C. Rickett, eds., (Oxford, Hart
Publishing,1998) 11 at 62; 'Agents,'supra note 33 at 25-6; S.W. Maysonet al., Mayson,
French,& Ryanon CompanyLaw (London: Blackstone,1997) at 128, 138 [hereinafter
Mayson].
36 I. Roxborough, 'DirectorsLiability'(1997) 141 Sol.J. 252.
37 Ottolenghi,supra note 34 at 341.
As Mayson,French,and Ryancorrectlystate,given
plifywhichcategory."8
the presentconceptualizationof the corporation,it 'would be impossible
to reconcile the hundreds of cases thoughtto be relevantto the argument or the dozens of academic opinions. Cases are decided byjudges
who adopt differentattitudesto the question and rarely,if ever, state
whattheirgeneral theoryof corporatepersonalityis.'" Despite thisproblem, some of the many 'principled categories' often put forwardinclude40agency,fraudor mere facade,group enterprise,trusts,interpretation of contracts,tort,enemy legislation,tax legislation,disrespect of
corporate formalities,other legislation,non-arm's-length
parent-subsidiaryrelations,and undercapitalization.
Looking at the list,one comes to the conclusion that there is really
nothing coherent about the categories.Rather,theymerelycategorize
the circumstancessurrounding whenthe veil is lifted,as opposed to
a principledbasis fromwhichthe courtsderiveauthorityto
exemplifying
pierce the veil. If it is indeed the former,these listsare of littleuse to the
judge or legal scholar.
Looking more deeply at the categories, one wonders why some of
them are even included. For example, whatdoes agencyhave to do with
veil-piercing?
Althoughagency,as currentlyapplied, has the same effect
as veil-piercing- viz, holding shareholders or directorsliable for the
debts of the corporation - it is arguably not a real violation of the
of that principle
separate entityprinciple.41Rather,it is a reaffirmation
because it allows thatone legal person, a corporation,maybe the agent
of another legal person,just as a naturalperson might.Yet, thiscategory
is to be found under the veil-piercingcategoryin many works on the
38 Pickering,supra note 33 at 483; A. Beck, 'The Two Sides of the Corporate Veil' in
Issues in CompanyLaw, J. Farrar, ed., (Auckland: Commerce Clearing
Contemporary
House, 1987) 71 at 72.
39 Mayson,supra note 35 at 128. See J.H. Farrar, 'Fraud, Fairness and Piercing the
Corporate Veil' (1990) 16 Can. Bus. L.J. 474 at 478 [hereinafter 'Fraud']
(Commonwealthauthorityis incoherent).
40 These categoriesare an amalgam of those posited to existin Pennington,supra note
30 at 47, ff.;J.H. Farraret al., Farrar'sCompanyLaw, 4th ed. (London: Butterworths,
1998) at 70 [hereinafterFarrar's];Sealy, supra note 28 at 60; J.S. Zeigel et al., Cases
and Materials on Partnerships
and Canadian Business Corporations,
3d ed., 2 vols.
(Scarborough, ON: Carswell, 1994) at 166 [hereinafterCases & Materials];Gower's,
supra note 9 at 173; Fraser,supra note 25 at 17, ff.;Principles,
supra note 9 at 119-25.
41 See Corpate Law, supra note 8 at c. 3. This disagreementno doubt stemsfromthe
case law on the subject,whichconfuses,mangles,and intermixeslegalagency,factual
control,lack of separate will (could one say puppetness?) and veil-piercinginto one
unrecognizable whole, see for example,Toronto(Cityof) v. Famous PlayersCanadian
Ltd. (1935), O.R. 314 (C.A.) [hereinafterFamousPlayers]& Wallersteinerv.
Corporation
Moir,[1974] 3 All E.R. 217 (C.A.).
182 UNIVERSITY OF TORONTO LAWJOURNAL
in including
subject.42Similarly,some authors also have great difficulty
of
the
to
interventions
as
'real' veilany
categories relating statutory
Are
these
to
the
Salomon
reallyexceptions
principle? Or do
piercing.43
these provisions,as express components of the legislativeframework
applicable to corporationsactually'define the corporateveil ratherthan
pierce it'?44
Beyond the disagreementsover the statutoryand agency categories,
what can be said of the others? Is there something more beyond the
datum that the corporate veil should be pierced when not to do so
'would yielda result"too flagrantly
opposed tojustice"?'45Most commentatorsthinknot. Farrar,forexample, has argued: 'there is no common
unifyingprinciple,whichunderliesthe occasional decisions of the courts
to pierce the corporateveil.'46 The Supreme Court of Canada has stated
as much.JusticeWilson argued in Constitution
InsuranceCo. ofCanada v.
for instance, that the courts have followed 'no consistent
Kosmopoulos,
principle' when piercing the corporate veil.47Thus, even our courts
recognize thatthese residual categoriesare not principledand coherent
interventionsbut ratherinstances of ad hocjudicial discretion." While
manyrecognize the need forchange and coherence in thisarea,49 others
are content to leave well enough alone so as not to hinder the court's
flexibility,50or insistthatsuch a rationalizationis impossible.51
This state of affairswould be almostcomical ifthe proper interpretation of the veil-piercingcases were not so importantto our understanding of corporate law. To reiterate,statuteand precedent posits that the
corporationis a separate legal person. Courtsand corporatelaw theorists
42 Ottolenghi,supra note 34 at 345. See Farrar's,supra note 40 at 70 or Sealy,supra note
28 at 60.
43 Gower's,
supra note 9 at c. 8; L. Cooke of Thorndon, 'A Real Thing - FirstHamlyn
Lecture' in TurningPointsoftheCommon
Law (London: Sweet& Maxwell,1997) 1 at 13
(statutoryinterventionsare not real veil-piercing).
44 'Agents,'supra note 33 at 26.
45 Constitution
InsuranceCo. ofCanada v. Kosmopoulos,
[1987] 1 S.C.R. 2 at 10 perWilsonJ.
See also Re a Company,
[hereinafterKosmopoulos].
[1985] B.C.L.C. 333 (C.A.) at 337-8
('the court willuse its powers to pierce the corporate veil ifit is necessaryto achieve
justice.').
46 Farrar's,supra note 40 at 69 takenfromBriggs amesHardie & Co. Pty.Ltd., [1989] 16
v..
N.S.W.L.R. 549 (C.A.) at 567.
47 Kosmopoulos,
note
45 at 10.
supra
48 See A.-G.v. EquiticorpIndustries
GroupLtd., [1996] 1 N.Z.L.R. 528 (C.A.) at 541 (veilpiercing is a process not a principle).
49 Ottolenghi,supra note 34 at 338, ff.
50 See Sealy, supra note 28 at 56 or L. Gallagher & P. Ziegler, 'LiftingThe Corporate
Veil in the PursuitofJustice'(1990) J. Bus. L. 292.
51 See Cheffins,supra note 3 at 334 and Beck, supra note 38 at 91.
then explain thatthisis thecentralprincipleof Canadian corporate law.

This central principle is then immediatelycontradictedwhen the separate legal existence of the corporationis denied by the courts,albeit in
'exceptional' circumstances.When the court is asked to justifythis
intervention,its only response seems to be because 'the situation demands' or 'I feel like it.' This state of affairsis unacceptable in such a
developed legal systemand smacksof arbitrary
justice, ratherthan of the
rational application of coherent legal rules to difficultfactual circumstances.52As one authorhas noted, the presentcasuisticapproach, 'even
ifpermissible,cannot satisfy
those who believe thata legal systemshould
be built, as far as possible, on a foundation of principle.'53Until this
whole area of law is reformed,or interpretedas complimentaryto the
separate legal entityprinciple, Canadian corporate law will remain
radicallyincoherent.Furthermore,thisinteractionwiththe veil-piercing
cases showsthe legal person doctrineas a weak cornerstoneon which to
build our corporatelaw edifice.
Upon closer examination,Canadian corporate law is also incoherent
in the second sense as its foundational principle fails to explain the
totalityof companylaw.Clearly,the 'legal person' doctrinehas done, and
continues to do some explanatorywork. It goes a long way toward
superficiallyillustratingmanyof the traditionalattributesof the corporation,such as legal personality,limitedliability,and perpetual succession.
Furthermore,the legal person doctrinecan also be marshalledto explain
to whom the directorsowe theirduties and in tandem withEquity,the
scope of thatduty.Thus, at firstglance, a pragmatistcan argue thatmany
of corporatelaw's basic principlesare seeminglyexplained withthe idea
thata corporationis a distinctlegal person.
Yet, if the logic of these assertionsis probed a littledeeper it can be
seen that the legal person doctrine does less explaining than was originallythought.Take, forexample, the limitedliabilityof shareholders.As
ProfessorFarrarexplains,the mere factthatthe lawrecognizesa separate
legal person does not necessarilymean thatlimitedliabilityis created as
a matterof logic.54Under English law, a companywitha separate legal
52 This is a paraphrase of L.C.B. Gower, Gower'Principles
Law, 4th ed.
ofModernCompany
(London: Stevens and Sons, 1979) at 138. See also, R.B. Thompson, 'Unpacking
Limited Liability:Direct and Vicarious Liabilityof Corporate ParticipantsforTorts of
the Enterprise' (1994) 47 Vand. L. Rev. 1 at 23 ('The legal doctrine of piercing the
veil is so amorphous thatit leaves a large area in whichcourtscan impose a smell test
of fairness.').
53 A. Domanski, 'Piercing the Corporate Veil - A New Direction?' (1986) 103 S.A.L.J.
224.
54 Farrar's,supra note 40 at 79.
184
UNIVERSITY OF TORONTO LAWJOURNAL
identitycan stillbe formedwithunlimitedliabilityforitsshareholders."

While one can argue that such a state of affairsis a 'leftover'from a
contractat itsbase, it does help to show that
systemwhichhas a statutory
limitedliabilityand separatelegal personalityare not conceptuallylinked
as stronglyas has been claimed. While the link between limitedliability
and 'legal person' is perhaps onlya minor explanatoryinconsistencyof
present doctrine, its response to directors' duties is a more glaring
failure.
As mentioned above, the legal person metaphorposits thatsince the
corporation is a separate legal person, and director's fiduciaries,a
director'sdutymustbe somethingsimilarto the command of the C.B.C.A.
to 'act honestlyand in good faithwitha viewto the best interestsof the
of interpretation:
corporation.'56Of course thereare obvious difficulties
Are therethreeelementsto the dutyor less?If thereare three,whatdoes
'good faith' add to 'honestly'and 'best interests'?Or conversely,do all
these words characterize the same quality of motive required of the
But beyond these typesof questions,there is the underlying
directors?57
of
problem actingin the 'best interests'of a legal person. What does this
reallymean? As ProfessorD.D. Prenticehas argued, the term'best interests' is 'one of the mostproblematicin companylaw,' 'oftenindeterminate' and 'arguablyincoherent.'58 The problem in this area of the law
stems from attemptingto read too much into the metaphor of 'legal
person.' As has been noted byjudgesand commentators,since a corporation is 'incapable of loyalty,or enmity,or residence,or of anythingbut
bare existence in contemplationof law,'"5a 'requirementto benefitan
artificialentity... would be irrationaland futile,since a non-realentityis
incapable of experiencingwell-being.'""If the 'legal person' metaphoris
replaced bythe names of the underlyingassetsresidingin the corporate
patrimonythis point becomes clearer. What 'interests' does a bank
account or trade goods (e.g.,tennisrackets) have apart fromthe people
who utilize themforthe fulfilment
of theirown purposes and interests?
The answeris 'none,' since onlynaturalpersonshave interests;creations
55
56
57
58
U.K.C.A., s. 1(2) (c), supra note 13.

See s.122 (1) (a); O.B.C.A.,s. 34(1).
'Regulation', supra note 8 at 457.
D.D. Prentice, 'Creditor's Interestsand Director's Duties' (1990) 10 O.J.L.S. 265 at
273 [hereinafter'Creditor's'].
59 DaimlerCo. Ltd.v. Continental
Tyreand RubberCo. (GreatBritain)Ltd.,[1916] 2 A.C. 307
(H.L.) at 340 per WaddingtonL.J. [hereinafterDaimler].
60 J.E. Parkinson, Corporate
Powerand Responsibility:
Issues in theTheoryof CompanyLaw
(Oxford: Clarendon, 1993) at 76.
of the law and inanimateobjects do not."' Thus, tryingto figureout what

the corporationwantsto do, or whatis in its 'best interests,'is like trying
to deduce its sexual orientation- an impossible task."2'As we have no
rationalwayof discerningthe answer,askingthe question is not a fruitful
exercise.'63
But given the clear statutorypronouncement and long case history,
the law attemptsto discern an impossibleanswer,usuallyin one of two
forms.The firstmethod is to ignore the conceptual difficultiesof 'best
interests'and push ahead withsolvingcases as ifa patrimonywas totally
analogous to a human being.64Perhaps,the clearestexample of thistype
of misguidedreasoningoccurs in the contextof hostile takeovers.Here,
an offerby one person for the personal propertyof another"5- that is,
theirshares of a company- turnsinto an attackon the existence of the
company and thus its interestin its continued 'life,' 'integrity,'and
In order to protectthese 'ultimateinterests,'common law
'personality.'"6
doctrine posits that the board of directorshas the power to protect the
corporation fromthis 'attack.' Thus, in 347883 AlbertaInc. v. Producers
PipelineInc.,67the courtstatedthat'defensivemeasures' bythe board are
permissibleso long as the directors(a) in good faithperceiveda threatto
the corporation,(b) acted aftera proper investigation,
and (c) employed
means that were reasonable in relation to the threat posed by the
But once the possibilityof corporationshavingmoral persontakeover.68
and
ultimate
interestsis denied, as itshould be, the argumentthata
ality
takeovershould be defended on thesegroundsbecomes unsustainable.If
corporationsdo not have interests,theycannot have a continued interest
61 'Regulation,' supra note 8 at 457. Support forthispropositionalso comes fromboth
traditionaland reformminded commentators,compare H.G. Manne, 'The Limitsand
Rationale of Corporate Altruism:An IndividualisticModel' (1973) 59 Va. L. Rev. 708
at 710 ('only individuals, not corporations, have interests') with C. Axworthy,
'Corporation Law as if Some People Mattered' (1986) 36 U.T.L.J. 392 at 398 ('in
contrastto real people, legal personalitieshave no interestsper se').
62 Corporate
a breach of fiduciary
Law, supra note 8 at 436 (in the context of ratifying
duty).
63 Ibid. at 436.
64 Thus, just like any other 'person' the corporationmust have 'interests'and mustbe
subject to moral duties,see D.J.Morrissey,'Toward a New/Old Theory of Corporate
Social Responsibility'(1991) 40 SyracuseL. Rev. 1005 at 1035.
65 See HowardSmithLtd.v. AmpolPetroleum
Ltd., [1974] 1 All E.R. 1126 (P.C.) at 1135-6
perWilberforceL.J. [hereinafterHoward] ('rightto dispose of sharesat a givenprice is
essentiallyan individualrightto be exercised on individualdecision....').
66 'Regulation,' supra note 8 at 418.
67 (1991), 80 D.L.R. (4th) 359 (Sask. C.A.) [hereinafterProducers].
68 Ibid. at 402. This is essentiallythe positionof the Delaware courts,see UnocalCorp.v.
Mesa Petroleum
Co., 493 A.2d 946 (Del. S.C., 1985).
in 'life' and do not need protecting.The ultimateirony,then,is thatin

interestsof the legal person from
its haste to safeguardthe non-existent
attack,the law arguablyencourages a board of directorsto violate the real
rightsthatshareholdersof the same class have to equal treatment."'
While the analogy to the human personalityis ultimatelyflawed,the
next solution often employed is to tryto discern whothe corporation
'really' is and, therefore,to whomthe directors' fiduciaryduties are
'really' owed.7" As Parkinson has argued, since the corporation is a
vehicle for natural persons to realize their interests,one only has to
locate the proper groups meant to be benefitedin order to answer the
dutyquestion.71 The troublewiththisprocess is thatbecause corporate
law is inadequately conceptualized, the term 'corporation' can be
interpretedto mean virtuallyanything.Therefore,one can reasonably
the
argue that the directors'fiduciaryduties are owed to the majority,72
of
the
or
the
shareholders,73
creditors,74
totality
community
employees,75
at large.7"Thus, corporatelaw is engulfedin a stakeholder'sdebate,77and
corporatelaw doctrine,both in and out of the courtroom,is throwninto
a 'crisis'78withno solution.Withouta proper legal theoryof the corporation one will never knowwho or what the corporationreallyis, nor the
contentand scope of the directors'duties.Therefore,these debates and
69 See F.H. Buckley, et al., Corporations:
Principlesand Policies (Toronto: Emond
MontgomeryPublications,1995) at 1094; L.E. Ribstein,'Takeover Defenses and the
Corporate Contract' 78 Geo. L.J.71 [hereinafter'Takeover'].
70 Axworthy,
supra note 61 at 399 ('To assess whata corporation'sinterestsare, one has
to ascertainthe interestsof some group of people connected withthe corporation').
71 Parkinson,supra note 60 at 77.
72 This flowsfromthe English.caselawwhichholds thata majorityof the shareholdersin
a general meetingare the company,see IsleofWight
Ry.v. Tahourdin(1883), 25 Ch. D.
320 (C.A.); Baronv. Potter,
[1914] 1 Ch. 895.
73 See Producers,
supra note 67 at 590 per Sherstobitoff
J. ('corporation cannot be
considered as an entityseparate fromitsshareholders'); Greenhalgh
v. ArdeneCinemas,
[1951] Ch. 286 (C.A.).
74 See Kinselav. RussellKinselaPty.Ltd. (1986), 4 N.S.W.L.R. 722 (C.A.) [hereinafter
Kinsela],quoted in textsurroundingnote 162, below.
75 See TeckCorp.Ltd.v. Millar(1973), 33 D.L.R (3d) 288 (B.C.S.C) at 313-4 perBergerJ.
(directorslook to interestsof the employees consistentwith'acting bona fide in the
interestsof the company').
76 See,
example,the communitarian scholarship in American corporate law,
.for
representingthe 'High idealist' position, Clark, supra note 9 at s.16.2.4 (688), a
bibliographyofwhichis in D. Millon,'Communitarians,Contractarians,and the Crisis
In Corporate Law' (1993) 50 Wash. & Lee L. Rev. 1373 at 1391 ff.
77 See Symposium,'Special Issue On The Corporate StakeholderDebate: The Classical
TheoryAnd Its Critics' (1993) 43 U.T.L.J. 297-796.
78 See Symposium,'New Directions In Corporate Law' (1993) 50 Wash. & Lee L. Rev.
1373-723.
arguments show the limited usefulness of the present 'legal person'

doctrine to adequately explain the nature and scope of directors' fiduciaryduties. Thus, in regardto directors'duties and limitedliability,the
contributionof the 'separate legal existence' doctrine is more meagre
than otherwisebelieved.
Beyond these problems, the 'legal person' metaphor also fails to
explain or justifycorporate law's most importantmodern innovations
and perennial problems.Examples of these deficienciesabound. Thus,
while the separate existence of the corporationexplains whythe shareholders are not said to own the corporate patrimony,it does little to
explain the nature of a shareholder's interestand the nature of the
share. Since the rightsand duties that'attach to a share' are in doubt, so
is theirfree transferability,
as well as the nature of the duties that shareholders might owe to one another. In other words, the legal person
doctrine cannot answer the question of whether there are fiduciary
duties betweenshareholders.7"
Anotherdeficiencyof thisdoctrinehas to
do withits inabilityto explain the circumstancesin which shareholders
willbe allowed to bringderivativeactions.If directors'duties are owed to
the corporation, then why are minorityshareholders ever allowed to
If the legal person
bring an action under the rule in Fossv. Harbottle?8o
doctrine is so central,whywas thislimitingrule amended under the new
statutorysystemso that there are wide remediesforminorityshareholders such as subsidizedderivativeactionsor compliance orders?8'Furthermore, what does the legal person doctrine tell us about the use of the
oppression remedyor about the separation of ownershipand control?82
The answeris thatit tellsus littleor nothing.In order forour corporate
law to be coherent, its central principle must be able to explain and
interrelateboththe internaland externalrules of corporate personality
and corporategovernance.Instead,Canadian corporatelaw,as presently
formulated,provides us with a 'basic' principle that incompletelyexplains some aspects of the law, with its worst failings amended and
ameliorated by a large statutorycontribution.This statutory'improvement' most often takes the formof an extraordinaryamount of discretion thatpermitsadjudicatorsto deal withcomplicated issues 'on an impressionisticand ad hocbasis.'8"Clearly,thisstate of affairsis unaccept79 Compare BrantInvestments
Ltd.v. Keel'rite
(1991), 3 O.R. (3d) 289 (C.A.) [hereinafter
Brant] (rejectingshareholderfiduciaryduties) withAllenv. Goldreefs
ofWestAfricaLtd.,
[1900] Ch. 656 (C.A.) (mustvote shares in the best interestof the company).
80 (1843), 2 Hare 461 (Ch. D.) [hereinafterFossv.Harbottle].
81 See C.B.C.A.,supra note 24 at ss.239, 247 O.B.C.A.,supra note 24 at ss.246, 253.
82 See C.B.C.A.,supra note 24 at s.241; O.B.C.A.,supra note 24 at s. 248.
able and once again smacks of 'whimsical'84justice rather than the

principledapplication of legal rules.
The truthis that although the law aspires to coherence, the best
conceptualizationof Canadian corporatelaw presentsitselfas littlemore
than an amalgam of warringprinciplesand themes,including majority
rule,minorityprotection,shareholders'rights,corporatepersonality,and
managerial power.85While thisrealizationis importantin demonstrating
that the legal person doctrineis not as centralas is currentlythought,it
does littleto show thatthe law is coherent.To do thatwould require one
to demonstratehow each principleinterrelatesand amplifiesthe otheras
part of an interrelatedwhole, rather than being merely 'isolated -and
unrelated emanations of state power.'86Such a taskwould require the
theoristto show how minorityprotectionflowsnaturallyfrommajority
rule, rather than being an arbitrarylimit on either majorityrule or
managerial power.87Likewise,one would have to show how our understanding of corporate personalityis enhanced by the veil-piercingcases
ratherthan being merelyconfused or contradictedby them. Given the
enormityof the task, I doubt whether this can ever be accomplished
accepting all the currentparadigmsand principlesof Canadian corporate law at face value. As ProfessorDavies contends,
ifone looksat themajordevelopments
thiscentury
and theproblemsthatthese
have thrownup, it is difficult
to avoid the conclusionthattherehas been a
reluctanceto recognisetheirimplications
forcompanylawand that,whenthose
have
been
the
reaction
has been to add to theexisting
implications
recognised,
framework
withouteverre-examining
its foundationsto ensurethattheyare
soundto beartheweightoftheexpandingsuperstructure.88
sufficiently
In response to this problem, this paper will offera new theoryof the
corporation - a fundamental principle - that unifies these disparate
elements and which might,consequently,prove 'sufficiently
sound' to
support our corporate law edifice and render it coherent. This model,
however,is notmeant to be descriptiveof the currentjustificationsfor
corporate law rules and it does not replicate the current thinkingof
84 B. Welling et al., Canadian CorporateLaw: Cases, Notes & Materials (Toronto:
Butterworths,
1996) at 358 [hereinafterCanadian].
85 Corporate
86 PrivateLaw, supra note 11 at 12.
87 Instead, Welling in Corporate
Law, supra note 8 at 604 argues that'majorityrule is no
longer an absolute in Canadian corporate law; it is conditioned by statute-based
minorityprotectionremedies which,in a broad range of areas, permitdiscretionary
judicial intervention.'
88 Gower's,
supra note 9 at 62.
CANADIAN
CORPORATE
LAW 189
to many
corporate law as to itsbasis. It maythus appearcounter-intuitive
in
the
current
if
the
paradigm.Hopefully,
stepped
pragmaticlawyercan
his
or
for
her
disbelief
he
or
she
willsee the potensuspend
long enough,
tial for thisconceptualizationof the corporationto solve manyof company law's intractableproblemsand inconsistencies.
II A privatelaw modelofthecorporation
In this section I will outline and supplementa privatelaw model of the

corporation that was firstenunciated by ProfessorDavid Stevens in a
lectureentitled'The Regulationof Takeoversand the Idea of the Corporation.'8"According to this theory,all the traditionalattributesof the
corporation- limitedliability,
perpetualexistence,effectivelegal personof
ality,separation of ownership and control, and free transferability
sharesare all seen as the outcome of contracts between natural
persons.90Thus, followingin the traditionof Hohfeld, thissection will
posit thatall rightsand duties thatcomprisea corporationare ultimately
reducible to statementsof law concerningnaturalpersons."'
Following the economic literatureof the agency cost theorists,the
privatelaw model argues thatthe core principleof companylaw is thata
corporation is a 'nexus' ofjural relations between the various players
involvedin itscreation."'2
This nexus formswhatin the civilian tradition
would be termed a 'special' or 'nominate' contractcontaining central
provisionsthat have been standardizedthroughusage and over time."!
The argument in this section is that the central characteristicsof this
contract are two-fold:a relationship of non-agency amongst the
shareholdersand between shareholdersand directors,and a promise by
89 See 'Regulation,' supra note 8.
90 Ibid. at 420.
91 W.N. Hohfeld, 'Nature of Stockholders' Individual Liabilityfor Corporate Debts'
(1909) 9 Colum. L. Rev. 285 at 289 ('a corporation is just an association of natural
persons conductingbusinessunder legal forms,methods,and procedures thatare sui
generis'and when we say that a so-called legal person has rights or that it has
contracted,in realitywe mean nothingmore thanwhatcan ultimatelybe explained by
describingthe capacities,rights,privileges,disabilities,duties,liabilities,and so on, of
the naturalpersons concerned).
92 For more on the agency cost theorysee, Romano, supra note 3. For the differences
between thismodel and othercontractualmodels of the corporationsplease see Part
II (E) (3), below.
93 'Regulation,' supra note 8 at 420. See also Farrar's,supra note 40 at 7; F.H.
Easterbrook& D.R. Fischel, 'The Corporate Contract' (1989) Colum. L. Rev. 1416 at
1444-5 (corporate law is a kind of standardformcontract).Unfortunately,
while this
idea is prominent in economic literature and the civilian tradition,the idea of
nominate contractsis not as fardeveloped in the common law.
the directorsto manage the corporatepatrimonywithcare and loyaltyso

as to maximiseitsnet presentvalue.
In order to findevidence of the characteristics
of the corporation,this
will
look
to
the
modern corporationsstatutes,"4judicial
paper
precedent,
and doctrinalwritingon the subject.Furthermore,where thereare gaps
or inconsistencies,thispaper willlook to the next closestlegal institution
in the common law, that of the Trust,!'5ratherthan to the contractof
partnership(which has been the traditionalanalogy used by commonwealthjudges to solve difficultproblems of interpretation).Thus, while
the private law model is innovative,it is not as radical as would first
appear. All of its answers to the difficultdoctrinal questions do not
'appear frommidair' or froman externalfunctionalapproach but rather
are grounded in, and evidenced by,whatwe as lawyersand jurists have
already committedourselvesto, at least by necessaryimplication.Many
thingsremain implicit,however,because 'the corporation'is a comparativelyyoung phenomenon by legal standards;the mere 100 yearssince
Salomonv. Salomonis not nearly enough time for the common law 'to
work itselfpure.'"
One word of caution is required, however,before the examination

begins. This section does not claim to answer all of corporate law's
questions and doctrinal difficulties.Instead it aims to constructa legal
foundation with which judges and legal academics may clearly and
conciselyanswerthe questions posed by especiallyvexing areas, such as
the veil-piercingcases or claims of shareholder oppression. With that
explained, an examinationof the interrelationof the privatelaw model
withbasic attributesof the corporationcan begin.
94 For example,C.B.C.A. and O.B.C.A. Under the private law model the legislator's
participationwillbe viewedas an effort,howeverunsuccessful,to enact in the styleof
a civilcode (i.e., delineatingthe centraland suppletivetermsof a legal form),rather
than in the traditionalcommon law styleof case law codificationand amelioration.
95 This analogyhas oftenbeen hinted at, see Guinnessplc.v. Saunders,[1990] 2 A.C. 663
(H.L.) per Goff & Templeman LJJ.(articles of association are similar to a trust
instrumentor deed). See also H. Hansmann & U. Mattei,'The Functions of Trust
Law: A ComparativeLegal and Economic Analysis'(1998) 73 N.Y.U.L.R. 434 at 438
('the partitioningof assets among creditorsthatis provided by trustlaw is much the
same as thatprovided bya businesscorporation').
96 Omychund
v. Barker(1745), 1 Atk.21 (L.C.). Westernlegal systemshave been working
on the core legal conceptions of contract and civil responsibilityfor well over a
thousand yearsand there is stillmuch debate over manyfundamentalissues in these
areas. It would thereforebe pure arrogance to assume that corporate law could
accomplish thiscomplex taskin less than one-tenthof the time.

A. LIMITED LIABILITY
Of the fiveattributesof the modern corporationthe privatelaw model

posits thatlimitedliabilityis the mostcentral.'"This interpretationas to
the centralityof limitedliabilityis generallyshared by the vast body of
economic literatureon the subject of corporate law'~8and by some
traditional-mindedtheorists."`In the context of the privatelaw model,
limited liabilitymeans that only the corporate patrimonyis legally
answerable to pay for obligations incurred by the participantsin the
corporate contract and that neither the shareholders, directors, or
employees should thereforebe liable for these debts.'l Due to the
centralityof thisconcept it is argued thatany theoryof the corporation
should be judged on the basis of whetheror not 'it providesa coherent
and accurate account of limited liability.'""1
As a result the task is to
construct limited liabilityout of the jural relations between natural
persons,whichcan be done in the followingmanner.
1. TheShareholder
Contract
('S' Contract)
The firstof these relationshipsis the contract between the original
shareholders.By means of this contractthe shareholdersestablishand
dedicate a group of assets to become the corporate patrimony.These
shareholders mutuallyagree to retain an undivided residual claim to
what theyhave dedicated - 'a share' - but no directrightof ownership
nor extensivepowerof administration.'"2
Instead,the shareholdersagree
to appoint administrators,the directors,to manage the patrimonyin
pursuitof a defined business.'03The 's' contractfurtherstipulatesthat
the shareholdersare not agentsof one anotherand cannot thereforebe
liable, qua shareholder,foreach other's obligations."'4Therefore,thisis
98 Yet while assertingthe centralityof the concept generallysome economic literature
findsthe rule inefficient,
see forexample,
P. Halpern, M. Trebilcock & M. Turnbull,
'An Economic Analysisof LimitedLiabilityin Corporate Law' (1980) 30 U.T.L.J. 117.
99 See J.S. Zeigel, 'Is Incorporation (withLimitedLiability)Too EasilyAvailable' (1990)
31 Les Cahiers de Droit 1075 at 1080 ('limited liabilityis undoubtedly the most
importantand common reason whylawyersrecommendincorporation'); Thompson,
supra note 52 at 6.
101 Ibid. at 420.
102 Thus, as in A.-G.R?ference
(No. 2 of 1982), [1984] Q.B. 624 (C.A.) the shareholders
could steal from themselvesbecause theyhave only an undivided shared interestin
the whole patrimony(assets and liabilities).
103 'Regulation,' supra note 8 at 420-21.
104 Ibid. at 421.
not a contract of partnership,and the shareholders are not 'mutualagents.'"05 Since shareholdersare not mutual-agentsand not generally
mutual-fiduciaries,'06
theyhave no legal interestin the identityof the
shareholders.
Taken
other
to itslogical conclusion, since the identityof
any shareholder is legally irrelevant,the rightsand duties of a share
could not be dependent upon itsholder.'07In otherwords,all sharesof a
class are equal in all respects, and since the share is the only nexus
between the shareholderand the corporatepatrimony,all shareholders
who own shares of a class are equal in thatrespectas well.'"0Thus, they
are equal withrespect to both theirrightsto vote formanagement and
fundamentalchanges (i.e.,governancerights)and theirrightsto share in
distributionsfrom the corporate patrimony.'" Furthermore,since the
identityof the owner is immaterial,a share is simplya fungiblepiece of
personal propertythat can be bought or sold at the owner's convenience."0 Thus, throughthe 's' contractand its necessaryimplications
one finds many answersas to nature of the share. In addition, the 's'
contract would include provisionsdealing with the internal make-up,
voting procedures, quorum requirements,majoritiesfor fundamental
change, and other necessaryprovisions."'
2. TheDirectors'
Contract
('D' Contract)
The second relationshipthatestablisheslimited liabilityis the contract
between the directorsand the totalityof shareholders."2Through this
contract,directorsare appointed by the shareholders and promise to
look onlyto the newlyestablishedcorporate patrimonyforfulfilmentof
105 Ibid. at 421.This position of non-agencyis similar to the position of beneficiaries
under a trustwho are not generallymutual agents, see D.J. Hayton, Haytonand
and Cases on theLaw of Trustsand EquitableRemedies,
10th ed.
Marshall: Commentary
(London: Sweet & Maxwell,1996) at 210 [hereinafterHayton].
106 See Brant,supra note 79; NorthWestTransportation
Co. v. Beatty(1887), 12 A.C. 589
(P.C.) (one can vote shares in one's own interest). If the corporation is properly
conceptualized, the impositionof such duties is unnecessary.The cases where they
have been imposed could be dealt with throughthe proper application of the 'D'
contract,re-examineSinclairOil Corp.v. Levien,280 A. 2d 717 (Del. S.C. 1971).
108 See Sparlingv.Caissedip6tetplacement,
[1988] 2 S.C.R. 1014.
109 See BowaterCanadian Ltd.v. R.L. CrainInc. (1987), 62 O.R. (2d) 752 (C.A.); C.B.C.A.,
(1889), 14 A.C. 525 (H.L.).
supra note 24 at s. 25; Birchv. Crooper
110 See RePolsonIronWorks
Ltd. (1912), 22 O.W.R. 84 (H.C.); 'Regulation,'supra note 8 at
428; Hohfeld, supra note 91 at 291. For a stronginterpretationof the proprietary
nature of the share, see Gambottov.
W.C.P.Ltd. (1995), 182 C.L.R. 432 (H.C. Aus.).
111 See C.B.C.A., supra note 24 at Parts V, XX; O.B.C.A., supra note 24 at Parts III,
VII-XVII.
their claims. Instead of the traditionalformulationof director'sduties,

which is confusingand incoherent,the directorspromise to manage the
patrimonywith care and loyaltyso as to maximise its net presentvalue
('NPV');"3 and to respectany other termsof the 's' contract."114
The directorsare thus empowered accordingly,with each fiduciary
power containing its own limits and with each promise limitingthe
other.""5Thus, for example, the 'D' contract gives full power to the
directorsto 'incur civil obligationsforwhich the corporate patrimony
alone is charged or benefited'so long as thisis done to maximizethe NPV
of the corporate patrimony.""While this is the primarylimit,the 'D'
contractshows thatdirectorsmayalso breach theirduties by contravening the termsof the 's' contract (such as the rightof shareholders to
equal treatment)."' As withthe contractbetween the shareholders,the
'D' contractis also a contractof 'non-agency,'statingthat the directors
are neither agents of each other, nor agents of the shareholders or
Instead, the directorshave the legal power to bind only
promoters."118
themselvesand the corporatepatrimony.Therefore,any contractualor
delictual obligation legallyobliges/benefitsonly that directorand the
corporate patrimony.It is also in the 'D' contractthat the directorsare
given a promise of indemnityfrom the corporate patrimonyfor any
expenses incurredin itsadministration."9
113 For evidence of the centralityof thispower,see C.B.C.A.,supra note 24 at ss.102(1),
s.122(3); O.B.C.A.,supra note 24 at ss. 115(1), s.134(3); Automatic
SelfCleansingFilter
SyndicateCo. v. Cunninghame,
[1906] 2 Ch. 34 (C.A.). Of course, in performingthis
promise, the directors must comply with all aspects of the general law, see M.
Friedman,'A FriedmanDoctrine- The Social ResponsibilityofBusinessIs to Increase
Its Profits'TheNewYorkTimes(13 September 1970) 33.
114 In the 'D' contract,the directorswould also be giventhe power to make distributions
to the shareholders from time to time, to initiatefundamental and constitutional
changes, and to oversee the corporatedemocracy.A reviewof the exact limitationsof
these powers and their interrelationshipwithone another is, however,beyond the
scope of thisinquiry.
115 'Regulation,' supra note 8 at 459, Howard,supra note 65.
117 Ibid. at 459; 'Takeover,' supra note 69. See also Gambotto,
supra note 110 (Company's
'best interests'invalidreason forthe expropriationof the minorityshares).
118 While thisconcept of 'non-agency'mayseem strangeat firstit also has a counterpart
under traditionalTrust doctrine where the Trustee is neither the agent of the
Beneficiariesnor the Settlor,see Hayton,supra note 105 at 120, 755. See also Clark,
supra note 9 at s.1.2.4 (22), wherehe statesthatthe relationshipbetweendirectorand
shareholdersis notone of legal agency.
119 See C.B.C.A., supra note 24 at s.124; OB.C.A.,supra note 24 at s. 136. This is also in
keeping withTrust doctrine,whichgivesthe Trustee a rightof indemnityagainstthe
trustfund to compensate her for any liabilitiesproperly incurred, see Blundellv.
Blundel,(1888) 40 Ch. D. 370; Hayton,supra note 105 at 6 & 751-5.
194
In combination, both the 's' and 'D' contracts contain all of the
elementsnecessaryto establisha corporation.For the sake of conceptual
certaintythe contracts are entered into simultaneouslythrough a
certificateof incorporationthatestablishesthe shares,the shareholders,
the corporatepatrimony,and those who are to administerit.120
With the
and
contract
in
to
how
we
can
on
examine
limited
'D'
place,
go
's'
works
with
to
both
tort
contract
creditors
of the
and
liability
respect
corporate patrimony.
3. ThePositionofContractual
Creditors
oftheCorporate
Patrimony
Limited liabilitywith respect to contract creditors is relativelyeasily
explained. Outside creditorsof the corporation make 'non-recourse'
contractswith the directors,or others authorized by the directors,to
These contractsprovide
charge or benefitthe corporate patrimony.'21
thatthe creditorwilllook solelyto the corporatepatrimonyforfulfilment
of the obligation and for damages for breach of that obligation. Thus,
neither the director,"22
shareholders,nor any other 'corporate agent'123
will be charged withthe burden or benefitof the contract.'24 In general
terms,this limited or non-recoursepromise can be properlyinferred
where any creditor knowinglycontractswith an agent/employee of a
In otherwords,
companydisplaying'Ltd.' or some similarabbreviation.'25
when a corporateagent signson behalfof 'x Corp.' the realityis thatthey
have agreed thatthe corporatepatrimonyis to be bound in returnfora
promise by the creditorthat the creditorwill execute only against that
patrimonyifthe relevantpromiseis breached.
121 Ibid. at 422; 'Limited Liability,'supra note 9 at 112.
122 This is the situationwiththe trustee,who is liable forall the debts of the Trustunless
she has made it clear that the creditorof the obligation has recourse only to Trust
corpus, see Lumsdenv. Buchanan (1865), 4 Macq. 950 (H.L.).
123 Of course, the use of the term'corporate agent' is a metaphor since only a natural
person can be a principal.This metaphor,however,accuratelydescribes the effectof
the 'D' and 'S' contracts.'Regulation,'supra note 8 at 422. Furthermore,ifnecessary,
the metaphor can be unpacked in the followingmanner. The corporate agent is, in
fact, an employee of the directorswho is capable of binding only the corporate
patrimony and has promised to look only to the corporate patrimonyfor any
indemnity.Likewise,a directorcan be classifiedas a corporate agent because of her
rightof indemnitybargained forin the 'D' contract.
124 'Regulation,' supra note 8 at 422. As F.H. Lawson, A Common
LawyerLooksat theCivil
Law (Ann Arbor, MI: Universityof Michigan Press, 1953) at 200 argues: 'What is a
modern limitedcompany ... but a device forlimitingthe access ofcreditorsto a single
fund?' For an analysisof the corporationas a fund,see Ford supra note 9 at 19-21.
125 On statutorily
permittedabbreviations,see C.B.C.A.,supra note 24 at s. 10; O.B.C.A.,
supra note 24 at s. 10. For more on this point, see discussion in Part III (E) on
corporate tort,below.
For many, this 'director/non-recoursecontract' analysis may seem

counter-intuitive,
especiallyin regardsto the enforcementofclaimswhen
directorshave retired,died, or been removed from office.Thus one
mightask, 'Whycan the creditorenforcehis or her claim on the corporate patrimonywhen their co-contracteehas been removed from the
picture?'In all of these cases, the contractcreditoris protectedbecause
he or she has purchased a claim in the corporatepatrimonyin the form:
'If promisenot performed,fundwillindemnify.'Since the directorshave
the power to bind the corporatepatrimonyin thisway,the indemnitycan
be said to followthe fund,'26whichtherebyeliminatesanyproblems that
a pragmatic lawyerwould have regarding personal contracts and a
shiftingboard of directors.Conceptually,the process is no differentthan
enforcingan easement- ifa formerpromiseis not performed,one need
of the property(i.e., directorsof
onlycompel the currentadministrators
the corporatepatrimony)to takeall actions thatare necessaryto respect
the claims that follow the property(i.e., release the funds required to
fulfilthe creditor'srightto indemnity).Interestingly,
thiscombinationof
an action forcompliance withsubsequentsatisfactiononlyfrompatrimonial propertymakes it seem as if the plaintiffhad sued the company
directlyand accounts forthe law's current'procedural step' thatallows
for this possibility.Thus, non-concensual through simple contractual
relationshipswe have established the limited liabilityof shareholders,
directors,and corporateagentsfromthe contractualdebts of the 'corporation' and justifiedthe abilityof a contractcreditorto execute judgementsin his or her favourdirectlyagainstthe corporatepatrimony.
4. ThePositionofTortCreditors
oftheCorporate
Patrimony
While limited liabilitywith respect to contractcreditorsis fairlyeasily
demonstrated,the task is generallyseen as much more difficultwith
Tort creditorsare, for the most part,'28nonrespect to tortcreditors.127
consensual claimantsand thereis a sense thatthereis somethingunjust
in the currentformulationof the law that does not allow these nonconsensual creditors recourse beyond the corporate patrimony.'29
126 This also conformswithTrust doctrinethatallowsa trusteeto create a chargewhereby
onlytrustpropertyis pledged forpaymentofa debt,see Hayton,supra note 105 at 755.
127 See R. Posner, EconomicAnalysisofLaw, 3d ed. (Boston: LittleBrown, 1986) at 372
(economic nexus of contract theory'breaks down' with respect to tortcreditors).
Limited liabilityfor tortis then defended on policygrounds,see D. R. Fischel, 'The
Corporate Governance Movement' (1982) 35 Vand. L. Rev. 1259 at 1274 (it is best
understood as a subsidyto encourage efficientprivateconduct).
128 That is, barringconcurrentclaims in contractand negligentmisrepresentation.
129 See,
example,H. Hansmann & R. Kraakman, 'Toward Unlimited Shareholder
.forforCorporate Torts' (1991) 100 Yale L.J.1879.
Liability
othershavearguedthatthecurrent
is
Likewise,
regimeoflimitedliability
thatprotects
shareholders
from
thevicarious
thattort
a privilege
liability
wouldotherwise
imposeon themfortheactsof theiragentsor employees.'30 The argumentof thissectionwillbe thatthistypeof limited
butis rathereminentlyjustified
isnota privilege
on generallegal
liability
itisnecessary
however,
principle.Beforemovingaheadwiththisanalysis,
to clearup a fewmisconceptions
thatmighthinderthediscussion.
The firstof these has to do withthe primary
of an agent,
liability
ordirector
fortheir
ownfault
ornegligence.
Is therea blanket
employee,
The answerof
immunityforthese corporateactorsfortheirown fault?''31
both the privatelaw model and the positivelaw is thatcorporatelimited
liabilitywill not absolve any natural person of liabilityfor their tortious
acts.'"' Thus, non-consensualtortcreditorswillalwayshave recourse to a
tortfeasor'spocketbook for satisfactionof theirclaims. The second of
these misconceptionshas to do withthe belief thatthe companycan be
primarilyand personallyliable for'its' own torts.'33When the privatelaw
model is used one sees thatthistypeof claim cannot existat privatelaw.
The corporate patrimonyis merelya fund, and since only a statutory
interventioncan deem an inanimateobject to act all privatelaw claims
against the corporate patrimonymustbe vicarious."13With these conditions in mind, the purpose of the followingdiscussionwillbe two-fold:it
will provide a justification for the limited liabilityof shareholders,
directors,and other employees/agentsfromvicariousclaims of liability;
and itwilldemonstratehow a fund,the corporatepatrimony,can be said
to be vicariousliabilityforthe actionsof a naturalperson.
This process of formulating'justifications,'however,is made all the
more difficultbecause the common law gives no formalor principled
130 Goddard, supra note 35 at 37; B. Bouckaert,'Corporate Personality:Myth,Fictionor
Reality?'(1991) 25 Israel L. Rev. 156 at 183.
131 For more discussion,see PartIII (E), below.
132 See, forexample,Wolfe
v. Moir (1969), 69 W.W.R. 70 (Alta. S.C.) [hereinafterWolfe
v.
Ltd. (1989), 60 D.L.R.
Moir]; B.G. PreecoI (PacificCoast)Ltd. v. Bon Street
Developments
(4th) 30 (B.C.C.A.) [hereinafterB.G. Preeco]both discussed below; Bergerv.Willowdale
A.M.C. (1983), 41 O.R. 2d 89 (C.A.) (no policyreason to denysuit againstcorporate
etal. (1986), 76 N.B.R. (2d) 271
president); Sullivanand SullivanFarmsLtd.v. Desrosiers
(C.A.) (manger liable for pollution caused by manure lagoon); Lewis v. Boutilier
(1919), 52 D.L.R. 383 (S.C.C.) (president liable for sending boy into dangerous
sawmill).
133 For a discussion on how the direct liabilitycases can be justified,see Part III (E),
below.
134 MeridianGlobalFundsManagement
Asia Ltd.v. Securities
Commission,
[1995] 3 W.L.R, 413
(P.C.) at 418-9 [hereinafterMeridian]perHoffmannL.J. ('a referenceto a company
"as such" mightsuggestthatthereis somethingout therecalled a companyof which
one can meaningfullysay thatit can or cannot do something.There is no such thing
as the companyas such, no dingan sich,onlythe applicable rules.')
legal reason for its regime of vicarious liability.Instead, the major

theorists(once again) offera 'hodgepodge' approach of 'reasons,' such
as control, master's benefit,revenge, care and choice, identification,
evidence, indulgence,danger,deterrence,satisfactionof claims,and loss
distribution."35
When these so-called legal reasons are examined, howone
finds
that there are not any particularlyconvincing legal
ever,
As
Professor
explanations.
Flemingargues: 'Despite the frequentinvocation of such tired tags as "respondeat superior" or "qui facitper alium
facitper se," the modern doctrineofvicariousliabilitycannot parade as a
deduction fromlegalisticprinciples,but should be franklyrecognised as
having its basis in a combinationof policy considerations.'""The problem withthispolicyanalysisapproach is thatno one is actuallysurewhich
policies are forwardedby the doctrineand none of the proposed policy
reasons, on their own, seem to 'justifythe scope of the doctrine of
vicariousliability.'"37
Despite the inadequacy of the common law itis suggestedthatthereis
in fact a formal and principled legaljustificationfor the doctrine of
vicariousliabilitybased upon the linkwithagent/employeeindemnification. Under this theory,the ultimateresponsibilityof any principal for
the acts of his agent/employeestems from the principal's promise to
indemnifythesepartiesforharmsincurredin the course of theiremployment.'38 The vicarious claim by the plaintiffagainst the principal/employer can be derived in the following manner: if the
agent/employeeis liable, then the tortcreditoris entitledto be compensated out of the agent/employee'spatrimony;one element of value that
the agent/employeeholds is the principal'spromiseof indemnification
forjust thistypeof situation;the agent/employeecan then compensate
135 This amalgam is taken fromP.S. Atiyah,VicariousLiabilityin theLaw ofTort(London:
Butterworths,
1967) at c. 2; R. Posner,EconomicAnalysisofLaw,4th ed. (Boston: Little
Brown, 1992) at 187; R. Flannigan, 'EnterpriseControl: The Servant-Independent
ContractorDistinction' (1987) 37 U.T.L.J. 25 [hereinafter'Enterprise'].
136 J.G. Fleming,TheLaw ofTorts,9th ed. (London: Sweet & Maxwell,1998) at 410.
137 'Enterprise,'supra note 135 at 31.
138 'Enterprise,'supra note 8 at 422. While the House of Lords 3-2 decision in Listerv.
Ice & Cold StorageCo., [1957] A.C. 555 (H.L.) [hereinafterLister]held that
Romford
there was in fact no rightto indemnityin a contractof employment,judges have
questioned the validityof the holding for many years,see Morrisv. FordMotorCo.,
[1973] 1 Q.B. 792 (C.A.) at 798 and see also LondonDrugsLtd. v. Kuehne& Nagel
InternationalLtd. (1992), 97 D.L.R. (4th) 261 (S.C.C.) at 287-8 per La Forest J.
[hereinafterLondonDrugs] (indemnificationmodel is properlythe 'best solution' to
the general problem of vicariousliability).German thinkingon the matter,which is
essentiallycorrect,is thatsuch a rightto indemnityis present in everycontractof
2d ed. (Oxford: Clarendon,
employment,see B.S. Markesinis,TheGermanLaw ofTorts,
1990) at 502-8.
the plaintiffby transferringthis valuable promise.1'" Since, in most

situationsthe damages will indeed be borne by the principal,the doctrineof vicariousliabilityeliminatesa duplicityof actionsbyallowingthe
plaintiffto be subrogatedto the tortfeasing
agent's rightto indemnification by means of a suit against the principle directly.Thus, we have a
formalexplanation ofvicariousliabilitythatcan now be used to examine
the limitedliabilityofshareholdersand directorswithrespectwithclaims
by tortcreditorsof the corporation.
Before doing that,however,it is interestingto note how thistheoryof
vicariousliabilityalso replicatesthe plaintiff'sabilityin positivelaw to sue
the corporate patrimonydirectly.Since directors,corporateagents,and
employeesall carrywiththema promiseofindemnityfromthe corporate
patrimony,the plaintiffmaybe subrogatedto thisclaim.140Withsubrogation complete,the realityof the situationmakes it seem as ifthe plaintiff
had sued the company directly.When this is realized, it is but a small
procedural step to sayingthatthe plaintiffmayalwayssue the corporate
patrimonydirectly."41Thus, fromthe agent's rightofindemnificationthe
privatelaw model can effectively
replicatethe currentdoctrinalabilityto
sue the company directlyand to demonstratehow the corporate patrimony can be said to be vicariouslyliabilityfor the actions of a natural
person.
Witha theoryof vicariousliabilitysketched,and an explanation of the
rightto sue the corporate patrimonyidentified,the central point that
now has to be addressed is tojustifythe limitedliabilityof the shareholders, directors,and other employees for the tortiousacts of a corporate
agent/employee.When vicariousliabilityis properlyunderstood,this is
in fact done quite easily and flowsas a matterof logic from the legal
principlesat play.As ProfessorDavid Stevensrightlycontends:
cannotrecoveragainstdirectors
orshareholders,
sinceno agent
[A] tortcreditor
of the corporationis byvirtueof thatfactan agentof the directorsor of the
shareholders
thereis no promisebythedirectors
and shareholdand,therefore,
ersto indemnify
thetortfeasor/agent.
in respectof the
Hence,limitedliability
tortobligations
ofthecorporation."14

140 Although thistypeof procedure mayseem strangewhen the subrogationis to a fund
rather than a natural person, such a process is also in accord withTrust doctrine,
whichallowscreditorsto be subrogated to the indemnityrightof the trusteefromthe
Trust corpus. See Hayton,supra note 105 at 6; ReJohnson
(1880), 15 Ch. D. 548.
142 Ibid. at 422.
In other words,since neitherthe directorsnor shareholderscommitted

an actionable fault themselves or promised to indemnifythe agent/
employee from their personal patrimonies,there is no legal basis for
imposing liability (either primaryor secondary) on the directors or
shareholdersfor the actions of a 'corporate' agent/employee.Liability
can onlybe imposed on the corporatepatrimonybecause, throughnonrecourse contracts,this is the onlygroup of funds in which a corporate
agent/employee has a claim. When viewed in this manner, limited
liabilityis not a privilegebestowedupon corporateactorsbythe legislator
but ratherflowsfromthe legal principlesthatapplyequally to all natural
persons.
While this view is coherent, its analysismightelicit some comments
froma pragmatic lawyer:'Well, what if I do not accept your theoryof
vicarious liability?Or, what if the true constructionof a contract of
employment,as opposed to one of agency,is thatthereis no promise of
Can the privatelaw model stillprovide limited liabilityfor
indemnity?143
shareholdersand directors?Or does thewhole model restsolelyupon its
own theoryofvicariousliabilityand itsown interpretationof the contract
of employment?'The answer to these questions is that,even given the
current black letter law, the private law model can provide effective
limitedliabilityforall corporateparticipants.
In order to answerthisquestion it is best to begin the analysiswiththe
shareholders, and it is necessary to break down the corporate
agent/employeemetaphor.When thisis done an answercan be formulated in the followingmanner.Whateverthe theoreticaljustificationfor
the principle of respondeat
it is a status-basedversion of civil
superior,
responsibility.In common law, the status that is legally importantfor
vicariousliabilityis thatof employer,ratherthan thatofowner,economic
From our analysis,it is clear that it is
beneficiary,or interestedparty.'44
the directors,not the shareholders,who are the employersof general
staffof a corporation.Therefore,there is limitedliabilityfor the shareholders for actions of a director's employees. The only unresolved
question thatremainsin respectofshareholdersis theirvicariousliability
forthe acts of theirdirectors.In otherwords,is a directoran employeeof
the shareholders?The answer on traditionaltort doctrine is relatively
clear. 45Since directorsare both fiduciarieswho have vast discretionto
143 As in Lister,supra note 138.
144 It is in thisconfusionof 'status'where commentatorssuch as Goddard, supra note 35
err.
145 As is usual in the common law tradition,it is unclear what test should be used to
determinewhetherone is an employee or an independent contractorforsituationsof
vicarious liability.This problem is exacerbated by the fact that the test transforms
manage the corporatepatrimony,and are not subject to directionsfrom

the shareholders,theyare bydefinitionindependent contractorsrather
than employees. Hence, there is also limited liabilityfor shareholders
when faced with the claim that theirvicarious liabilitystems from the
faultof directors.
This brings us to the question of the directors.Of course, when a
traditionalstatus-only
based justificationof vicariousliabilityis used, the
has
who
been
plaintiff
tortuouslyinjuredbyan 'employee' of a corporate
could
sue
the directors as the actual 'employers' of the
patrimony
since
a fundcannot in truthcomplete a contractor
corporateemployees,
act as principal.While thismaycast a doubt on the limitedliabilityof the
directors,it must be rememberedthat,in respect of damages imposed
upon them for vicarious liabilityof the employees, the directors are
entitled as ofrightto indemnityfromthe corporatepatrimony.Thus, so
long as the patrimonyis adequately capitalized or insured,all directors
enjoy effectiveor practical limitedliabilityfor the actions of corporate
employees.
In sum, we can thereforesay thatthe privatelaw model is capable of
providinga coherentaccount of limitedliabilityfordirectors,shareholders, and other employeesfromthe claims of tortcreditors.This analysis
holds truewhethervicarious liabilityis based on a rightof indemnityor
purelyon status. Since the privatelaw model also provides a coherent
account of limitedliabilityfromcontractcreditorsforboththe shareholders and directors,it can provisionallyclaim to be a valid theoryof the
corporation.All thatremainsis to see iftheprivatelawmodel can account
forthe otherattributestraditionally
associatedwiththe corporation.
B. EFFECTIVELEGALPERSONALITY
The 'D' and 's' contractscreate a separate corporate patrimonyand

divide the incidents of ownership between the directors,who are to
administerthe property,and the shareholders,who hold the residual
proprietaryrightsand exercise limited supervisoryfunctions."14When
this is combined with 'non-recourse/fund-following'
contracts with
depending on the purpose forwhich it is used - verydifferentconsiderations,and
thus tests,are used to distinguishbetween the two legal classificationsin taxation,
social security,workers' compensation, privatelaw, and industrialsafetycases, see
Fleming,supra note 136 at 409-13 and Flannigan,supra note 135 at 25, 27. But as
Fleming, at 416 notes, the 'temptationto use precedents interchangeablycalls for
caution because the same policymaynot be involvedin a different
context.'Withthis
in mind it is submittedthatthe best formaldistinctionbetween the twoforthepurposes
ofprivatelaw is the traditionalcontrol test(which also concords withcivilianthinking
on the issue, see Arts.2085, 2098, 2099 C.C.Q.).
creditors, the use of corporate agents, and the subrogation of tort

creditorsto an agent's indemnityclaims,we have created a separate fund
which 'may be charged withcivilobligations,as though it were a principal, a real person."'47When these two ideas of a separate corporate
patrimonyand the statusof principal are combined, one sees how this
nexus of contractsmanifestseffectivelegal personality.Thus, in many
situationsit makes sense to use the expression'legal person' to speak of
the corporationor companyas though
itwere a naturalperson. When the
are
situations
legal
simple, this metaphor substitutes'for the more
complex legal descriptionjust sketched."'
148Therefore,in manyordinary
cases it is quite appropriateand usefulfor thejudge to use a traditional
(albeit morallyde-personified)theoryof the corporation to solve legal
problems.'4"But it mustalso be rememberedthat in more difficultfact
situationssuch as those dealing withoppression,veil-piercing,or takeovers,the metaphorwillhave to be deconstructedso that the courtswill
not be misled by oversimplificationand thereby corrupt Canadian
corporate law doctrine.150
C. FREETRANSFERABILITY
OF SHARES
Much like the other traditionalcharacteristicsof the corporation,free

of sharesflowsdirectlyfromthe necessaryimplicationsof
transferability
both the 'D' and 's' contracts.Since both of these establishthat shareholders are notmutual agents of each other or the directors,there is no
juridical reason whythe status of shareholder should depend on anythingother than the abilityof the transfereeto pay the purchase price of
the shares.'"' Thus, we have freetransferability
of shares.
D. PERPETUALEXISTENCES&SEPARATIONOF OWNERSHIPAND CONTROL
Perpetual existencealso flowsfromthe nexus of contractsthatcreate the

corporatepatrimony.Since sharesare freelytransferableand inheritable,
and directorsare replaceable on election by the shareholders,both the
continued 'existence' of the corporatepatrimonyand itsadministration
147 Ibid. at 422.
148 Ibid. at 423; M. Radin, 'A Restatementof Hohfeld' (1938) 51 Harv. L. Rev. 1141 at
1161. In thissense, the metaphorof the 'corporation' is a like an algebraic termwhich
simplifies mathematical analysis, L.L. Fuller, Legal Fictions (Stanford: Stanford
UniversityPress, 1967) at 81.
149 As Bouckaert,supra note 130 at 157 has argued, 'It would be foolishto deny,against
the common wisdom of legal practice in nearlythe whole world, that the notion of
corporate personalityhas [some] value forthe legal order.'
150 As Cardozo J. stated in Berkey
v. ThirdAve. Ry., 244 N.Y. 84 (C.A. 1926) at 61,
'Metaphors in law are to be narrowlywatched, for startingas devices to liberate
thought,theyend oftenbyenslavingit.'
151 'Regulation,' supra note 8 at 423; Hohfeld, supra note 91 at 306.
are not dependant upon the lifeof any one naturalperson.'52 Logically,
therefore,a corporation may, just like a valid purpose trust,exist
forever.'53Similarly,
since the corporatecontractsprovideforthe powers
of the directorsto manage and enumerate the situationsin which the
shareholderswill be able to intervene,the separationof ownershipand
controlis also effectedthroughthe privatelaw model.'54
Therefore, since the private law model can replicate and explain
limitedliability,legal personality,freetransferability
of shares,perpetual
existence, and separation of ownershipand control throughjural relationshipsbetweennaturalpersons,itis a validand persuasivelegal theory
of the corporation.All thatremainsis to testthe privatelaw model of the
corporation on trulydifficultfactsituationsto show thatit does indeed
providea bettertool fordealing withcorporatelawproblems.But,before
going on to thatendeavour,itis necessaryto deal withthe mostprobable
questions and classic objections to the theoryjust proposed.
E. QUESTIONS AND OBJECTIONS RELATING TO THE PRIVATE LAW MODEL
1. GeneralResponses
Given thata theorysuch as thatproposed here is a radical departure,in
some senses,fromthe traditionalblack letterlaw,thereare bound to be
many questions and objections. In order to confrontthese concerns in
an orderlyfashion,it is proposed to deal withthe mostparticularobjectionsfirstand then to move on to the more theoreticalobjections later.
Perhaps the firstof these objectionsbythe pragmaticlawyerwould be
somethingsimilarthis:'If thereis no legal person,and the shareholders
are the creditorsof the obligation,then clearlythe obligation must be
somethinglike actingin the best interestsof shareholdersor maximising
shareholdervalue?' Whyis the promiseto 'maximizeNPV'?The answerto
thisquestion is three-fold.The firstreason to preferthe NPVinterpretation is thatit helps to underscore,and flowsfrom,the 'non-agent' characterizationof the directors'obligation to the shareholders.Since the
object of the obligation is not forthe directbenefitof the shareholders,
the courtswillbe less likelyto mischaracterizethe relationshipas somethingelse, most notablya partnership.'15
153 Ibid. at 423.
154 As Pickering,supra note 33 at 502 states,'Like the trust,the company enables the
proprietaryinterestsofnaturalpersonsto be associated and reconstitutedin a manner
whichmakes possible a real divisionof theownershipand controlof theproperty.'
155 For an example of this mistake,see Goldwater
v. Oltman,210 Cal. 408 (S.C. 1930)
(abilityto elect trusteechanged organisationfromnon-agencyTrustto mutual-agency
partnership).
The second reason for the NPVpromise is that it eliminatesmanyof

the problemsand questions inherentin the formulationof the directors'
dutyin termsof 'shareholderinterest'or 'value.' One of thesequestions,
whichultimatelyarise,is whichshareholders'interestor value should the
the preferred,
the majority,
directorsbe seekingto maximize:the totality,
or the common?'"6Anotherof these questions relatesto the timeframe
of the maximization.Should the directorsfocus on short-,medium-,or
long-termvalue?'57 When viewed as an obligation to maximise NPV,
however,these problems do not occur. Since it is the value of the patrimony thatis being maximized,it is the totalityof the shareholderswho
willbenefit.Furthermore,since the standardused is NPV,the timeframe
and riskof any giveninvestmentare alreadyincluded in the calculation,
as 'present' value reflectsthe expected streamof cash flowdiscounted by
When viewedin thismanner,theNPV
the timevalue ofmoneyand risk.s58
thus
most
both
what
the shareholderswould want and
is
likely
promise
meant bythe courts'use of 'best interests,'at least
whatwas traditionally
before the adventof the hostiletakeover.
'59
The third and more importantreason for the NPV promise is to
obviate the tendency,currentlyen vogue,of arbitrarilyswitchingthe
object of the obligation when the corporate patrimonyis approaching
insolvency.This novationunder traditionaldoctrineis necessarydue to
the well-knowndivergence of shareholder and creditor interests at
insolvency.160This switchingwas traditionally
accomplished throughthe
rationalizationthat the 'company,' which was once the shareholders',
'magically'becomes 'the creditors'throughthe factualrealizationthatat
insolvencythe creditorswere the only 'residual' claimants.'"' As was
statedin Kinselav. RussellKinselaPty.Ltd.:'62
In a solventcompanytheproprietary
interests
oftheshareholders
entitlethem
as a generalbodyto be regardedas thecompanywhenquestionsofthedutyof
directors
arise....Butwherea companyis insolvent
theinterests
ofthecreditors
156 For examples of inevitable conflict,J. R. Macey & G. P. Miller, 'Corporate
Stakeholders: a Contractual Perspective' (1993) 43 U.T.L.J. 401 [hereinafter
'Corporate'].
157 Parkinson,supra note 60 at 90.
158 Ibid. at 90; Buckley,supra note 69 at c. 1.
159 See Dodgev.FordMotorCo.,204 Mich. 459 (S.C. 1919) at 507; Cheffins,supra note 3 at
322.
160 'Creditor's,' supra note 58 at 265.
161 Mayson,supra note 35 at 475 & D.D. Prentice, 'Corporate Personality,Limited
in the20thCentury,
R.
Liabilityand the Protectionof Creditors'in Corporate
Personality
Grantham& C. Rickett,eds. (Oxford, Hart Publishing,1998) 99 at 107 [hereinafter
Personality].
Corporate
162 Supra note 74 at 730 perStreetC.J.

entitledthroughthemechanism
ofliquidaintrude.Theybecomeprospectively
todealwiththecomanddirectors
tion,todisplacethepoweroftheshareholders
sensetheirassetsandnottheshareholders'....
pany'sassets.Itisina practical
Therefore,the 'best interests'of the companyare stillbeing served.The
only differenceis that the determinationof 'who' comprised the company has changed. But, this factual realization of who is to benefit
through liquidation is not a sufficient
justificationto change the legal
characterizationof the duty,absent legislation.The factual dilemma is
solved,however,bythe promiseto maximizeNPV.When the directorsare
under such a duty,theywill not be legallyallowed to 'bet the farm' in
these situationsbychoosing a higher-variance
lower-NPV
value investment
to benefit the shareholders.'16 Therefore,since there is littlepractical
differencein the outcome between a dutyto maximizeNPVand one for
the benefitof shareholder interestsor value,l" but large gains in legal
coherence to be made byadopting the NPVinterpretation,
it is suggested
thatthe privatelaw model's formulationis to be preferred.
This immediatelyleads to the nextquestion fromthe pragmaticjurist,
'What good is it forthe creditorsto have a dutyto maximizeNPVif they
cannot enforce it?' Stated froma differentperspective,what about the
expectations of creditors?Since our legal systemonly protectsexpectationsthatare the resultof contractualundertakingsorjustifieddetrimental reliance, the question mustbe 'Do "corporateagents"also make the
NPVpromise to creditors?' Clearly,directorsand corporate agents do
sometimes explicitlypromise to maximize NPVand, if this is done, the
creditorcan enforce thisor any similarpromise if it has been explicitly
included in the debt contract.'65However, it also seems likely that
directorsand corporate agents also implicitlymake this promise to, or
engender detrimentalreliance in, all outside contractingparties. Evidence that there is such an implicitpromise, or real reliance, can be
found not only in the Canadian corporate law remedies which are
framedwidelyenough to include conduct detrimentalto a creditor,'66
163 'Regulation,' supra note 8 at 421. For examples ofwhere 'shareholderinterest'would
tempt one to choose a lower NPV investment,see 'Corporate,' supra note 156 at
407-9.
164 For a similarview,see Clark,supra note 9 at s.16.2 (678).
165 Sophisticated lenders often do protect themselveswith similar precautions, see
Cheffins,supra note 3 at 81.
166 See C.B.C.A.s. 241 (1) whichstatesthatan action maybe broughtforoppressionwhen
the actions complained of 'unfairlydisregardsthe interestsof any securityholder,
creditor,directoror officer.'Furthermoreboth s.238 (d) ('complainant' is 'any other
person who ... is a proper person') and s.1 ('security'includes 'a debt obligation') are
set wide enough to include a creditor.See also O.B.C.A.,s.248, s.245. In the case law,
but also in the ever-increasing

Commonwealthcase lawwhichpositssuch
a duty.'67Thus, giventhe evidence, it is suggestedthatin the majorityof
cases it is proper to interpretan outside contractfor the benefitof the
corporatepatrimonyas containingan implied termthatthe directorswill
act with care and loyaltyto maximize its NPV.What should be noted,
however,is that the rightof such a creditorwould rarelybe exercised
outside conditionsof insolvency.So long as the creditorsare being paid,
theywould have no materialinterestin the costlylitigationnecessaryfor
itsenforcement.
A related question is, 'What is the effectof shareholder voting in
relation to breaches of the directors'NPV promise? If a majorityof the
shareholders could ratifybreaches, then the protection offered to
minorityshareholdersand creditorswould be meaningless.' Pleasantly,
the Canadian case law, doctrine, and the privatelaw model are all in
substantialconformity
on thisissue. Since the shareholders are not in a
relationshipof agencywiththe directors,theyare not principalswho can,
even theoretically,
a breach.'16 Similarly,since the contractualright
ratify
to have the directors'honour theirduties can be enforced by all shareholders, there is no way that these breaches can be sanctioned by any
majority.Likewise,ifthe 'maximiseNPV promise' is made to creditorsas
well,even the unanimousvote of the shareholderswould not effectrights
created by an outside contract.As ProfessorWelling correctlyargues,
ratificationcan only cure a breach of duty when it is 'voiced by the
person to whom the dutywas owed. A purported ratificationby one
FirstEdmonton
PlaceLtd.v. 315888 Alberta
Ltd. (1988), 60 Alta. L.R. (2d)
see,forexample,
122 (Q.B.); PrimeComputer
(1992), 6 O.R. (3d) 673 (Gen. Div.)
ofCan. Ltd. v.Jeffrey
(removal of funds from corporation oppressive to creditor). For a view that these
provisionsand cases give evidence of some typeof dutyto creditors,see 'Regulation,'
supra note 8 at 458; Buckley,supra note 69 at 770;J.S. Ziegel, 'CreditorsAs Corporate
Stakeholders: The Quiet Revolution - An Anglo-Canadian Perspective' (1993) 43
U.T.LJ 511.
167 See, forexample,
Re TrizecCorp(1994), 21 Alta.L.R. (3d) 435 (Q.B.) at 447 perForsythJ.
('a specificdutyto shareholdersbecomes intermingledwitha dutyto creditorswhen
the abilityof a companyto pay itsdebts becomes questionable'); Winkworth
v. Edward
BaronDevelopment
Co. Ltd., [1987] 1 All E.R. 114 (H.L.) at 118 perTempleman L.J. ('a
company owes a dutyto creditors,present and future.... to ensure thatthe affairsof
the company are properlyadministeredand that its propertyis not dissipated or
(1976), 50 A.L.J.R.446 (H.C. Aus.) at 449 perMasonJ.
exploited); Walkerv.Wimborne
('The directorsof a companyin dischargingtheirdutyto the companymusttake into
account the interestsof itsshareholdersand itscreditors.')See also LonrhoLtd.v. Shell
Co. Ltd., [1981] 2 All E.R. 456 (H.L.); Grovev. Flavel(1986), 43 S.A.S.R. 410
Petroleum
(S.C); Nicholsonv. Permakraft
(N.Z.) Ltd., [1985] 1 N.Z.L.R. 242 (C.A.); Kinsela,supra
note 74.
person cannot operate to cure a breach of duty to another.''" Thus,

although a person or a group of people can decide to forgivea breach
personally,thishas no effecton the rightsof the others.170This conclusion as to the irrelevanceof shareholderratification
of fiduciarybreaches
is also evidenced bysection242 of the C.B.C.A.'71 and is in conformity
with
the Trust doctrine on the issue. 72Thus, as ProfessorWelling astutely
claims,the issue of 'ratificationis passe in Canadian corporatelaw.'73"
Another objection to the privatelaw model is that it would create a
systemthat destroysthe present regime's equal treatmentof creditors
and shareholdersin the recoveryof damages fordirectors'malfeasance.
Under thisview,the primaryfunctionof the 'legal person' doctrineand
is to guarantee thatall
'procedural' rules such as those in Fossv. Harbottle
for
harm
done
the
directors
will
be
'mediated
damages
by
throughthe
and
shared
in
all
to
their
stake."17
Present
by
company'
proportion
doctrine,therefore,ensures thatno one can 'jump the queue,' recover
personal damages fromthe directors,and therebyprejudice the chances
of recoveryfor other stakeholdersin the company. Furthermore,these
same authors contend that the 'legal person' metaphor is effectivein
ensuring that there is neither a multiplicityof actions nor 'double
recovery'for the same loss.175Under this view the privatelaw model is
flawed,especiallyin situationsof insolvency,in that it cannot replicate
thismediation of damages throughthe company,whichguaranteesthat
all claimantswillbe treatedon a paripassu basis.'76
While thisargumentappears persuasive,an examinationof the private
law model revealsthatit does in factreplicatethe mediationof damages
throughthe corporate patrimony.Under privatelaw principles,when a
creditoror shareholder sues the director,she is only allowed to receive
damages thatreflecther actual loss. In order to compensate the plaintiff
properly,the court has two options. The first,and most conceptually
certain of these, is to order thatdamages for the whole breach be paid
into the corporate patrimonyso thatall shareholdersand creditors'are
compensated exactlyin accordance withthe harm caused to them,and
169 Corporate
171 C.B.C.A.,supra note 24 at s. 242(1) (application willnot be dismissed'by reason only
that it is shown that the alleged breach of a rightor duty ... has been or may be
approved by the shareholders'). See also, O.B.C.A.,supra note 24 at s. 249(1).
172 Corporate
173 Ibid. at 438.
174 D.D. Prentice, 'Shareholder Actions: the Rule in Fossv. Harbottle'(1988) 104 L.Q.R.
341 at 341.
175 'Creditor's,' supra note 58 at 275.
176 This seems to be the implicationof Corporate
supra note 161 at 108.
Personality,
The second option is to grant the

in accordance with their rights.'"77
that reflectsthe exact amount
plaintiffan award, where practicable,"78
thattheywould have receivedhad the whole amount of the breach been
paid into the corporate patrimonyand distributedback to the plaintiff.
Either way, the effectis that the damages are 'mediated' through the
company,ensuringthatno shareholder or creditorcan get a 'leg up' by
suing first.
A further,albeit more theoretical,objection to the privatelaw model
proposed is the claim thatunder our systemof common law it isjust not
possible to create a separate patrimonyby the mutual agreement of
naturalpersons.'17 In orderforsuch a creationto be effectivethe participation of the legislatoris necessary.180Althoughthismayseem persuasive
at firstglance, the analogy withthe Trust helps to show whythisviewis
not plausible. In his influentialtexton the law of Trusts,'8'ProfessorD.J.
Hayton definesthatinstitution:
A trustariseswhereproperty
is transferred
tobe managed
bya persontotrustees
or dealtwithforthebenefitof the beneficiaries
or a charitablepurpose:such
is notpartof thetrustee'spatrimony
butis a separatefiduciary
property
patricreditors,
monynotavailableforthetrustee's
spouseor heirs.'82
Furtheron in his definition,ProfessorHayton also comments that the
Trustinstrumentneed not be filedor registeredwithany officialagency
and is oftena confidentialdocument knownonlybythe trusteeand the
Thus, given that the common law already allows for the
beneficiary.'8*
creation of separate patrimonieswithoutthe interventionof the legislator,it is clear thatit is possible to create a corporatepatrimonythrough
the use of the privatelaw model.'84

178 It mightbe impracticablewhen the calculations are too complex or where there is a
of actions pending. In these cases, thejudge would simplyorder the first
multiplicity
remedy.
179 This seems to be the argumentofWolff,supra note 2 at 497.
180 See also, Gower's,supra note 9 at 7 (corporate law's main functionis to empower
people 'to do what theycould not otherwiseachieve - namely,to create a body with
distinctcorporate personality').
181 Hayton,supra note 105.
182 Ibid. at 1.
183 Ibid. at 2.
184 See also, M. Radin, 'The Endless Problem of Corporate Personality'(1932) 32 Colum.
L. Rev. 643 at 654 [hereinafter'Endless'] ('there is no reason in the world,why,if
men choose to do so, theycannot be permittedto pledge, not theirpersonal credit,
but onlya specificamount of propertyor money').
The next related objection is that the private law model cannot
explain how a 'one-personcompany'can be formed,in contradistinction
to the 'logical' outcome of the legal person doctrineenunciated in such
cases as Salomonv. Salomonand Lee v. Lee's Air FarmingLtd.s85In other
words,ifit is truethatthe privatelaw model is a nexus of contracts,how
can a single person create one? It is here where the analogy with the
Trust is also helpful.Justas a person maydeclare herselfto be a trustee
of propertyby a unilateralact,'86one can also performthe 'D' and 's'
contractsthrougha unilateraljuridical act. Thus, a person may declare
that she has transferredassets to a separate patrimony,will administer
that patrimonywith care and loyaltyto maximize its NPV,and then
contractwithoutside creditorson thatbasis.'87Of course, ifshe commits
a tortwhileactingas a director,the tortfeasor
willbe liable to the injured
partyjust as any director may. But, like any director,she will also be
entitledto an indemnity.Thus, so long as the corporatepatrimonyis not
undercapitalized,the 'one-woman company' will enjoy limited liability
fromboth tortand contractcreditors.
2. Specific
ResponsetoH.L.A. Hart
While the aforementionedobjections have been answered,perhaps the
most potent criticismlevelled at any theoryresemblingthe privatelaw
model was thatespoused byH.L.A.Hart in his influentialarticle,'Definition and Theory in Jurisprudence.'188 In formulatinghis own positivist
account of corporate personality,ProfessorHart took time to let his
concerns be knownover Hohfeld's theoryof the corporation.The question now is whetheror not the newerversionof the privatelaw model can
meet this challenge. Hart's objection to the privatelaw model was twofold and consistsof the argumentthatit givesus both too much and too
littleas a theoryof the corporation.It givesthejurist too much because
'[i]t dissipates the unityof the simple statement'Smith & Co. has a
contractwithY,' and substitutesa statementof the myriadlegal rights,
duties, powers, etc., of numerous individualsof whom we never have
185 [1961]A.C. 12 (P.C.).
186 See Paulv. Constance,[1977] 1 All E.R. 195 (C.A.). In fact,declaringoneself a trustee
is one of the principalwaysto constitutea trust,see Hayton,supra note 105 at 277.
This analogy with the Trust can be taken only so far,however,given the merger of
legal and equitable titlethatoccurs under traditionaldoctrine when these interests
are held by a single person, see Westdeutsche
LandesbankGirozentralev.
IslingtonL.B.C.,
[1996] 2 W.L.R. 802 (H.L.) at 830 perLord Browne-Wilkinson.
187 'Regulation,' supra note 8 at 420-1.
188 H.L.A. Hart, 'DefinitionAnd Theory In Jurisprudence'in EssaysinJurisprudence
and
(Oxford: Clarendon Press,1983) 21.
Philosophy
thought...." " In other words,the privatelaw model's definitionof the

corporation has destroyedthe verything that it had sought to explain
and in so doing defined a highlyfunctionalpiece of doctrine out of
existence."' Such a theoryalso givestoo littlebecause it does not 'draw a
conclusion of law fromthe special rules relatingto companies and from
rulesextended byanalogyfromthe case of individuals.'
1'1 In otherwords,
it doesn't explain how and why the current law operates to impose
liability on corporations through an analogy with natural persons.
Instead of thistypeof inquiryintowhata corporationis,Hart argues that
thejurist should instead ask herselfthe question, 'Under what typesof
conditionsdoes the law ascribe liabilitiesto corporations?'1"
2
Hart's argumentsfailto
Althoughthoughtprovokingand interesting,
be a whollypersuasiveattackon the privatelaw model of the corporation
for the followingreasons. If in regardsto the claim that the privatelaw
model givestoo much,Hart's argumentis simplythatsuch a theoryis too
complicated to be useful;it is seriouslyflawed.Many of our legal institutions,such as the Trust,are in factmore complicatedthan the privatelaw
model of the corporation herein proposed. Furthermore,what Hart
seems to forgetis that legal statementsrelatingto natural persons are
equallycomplicatedin his theory.As ProfessorCarl Auerbach argues,the
statementthatSmithowes a thousand pounds to Y 'is as complicated as
the legal personalityof the 'Smith & Co.' ... The legal personalityof
Smithmustalso be analysed ... and inquirymade into the lawsdetermining which of Smith's assets are subject to and which exempt from
execution, whether Smith may go into voluntaryor be driven into
involuntarybankruptcy,etc.'19' So the conceptual rigourand completeness of the privatelaw model cannot, by itself,be grounds for it giving
thejurist too much.
If the argumentis that,in comparison with the simple idea of the
'legal person' the privatelaw model destroysthe functionalutilityof the
concept, than this is equally untrue. The privatelaw model does not
dispute thatit can be usefulto use the metaphorof the 'legal person' in
a simple situation,such as Hart's example of makinga contractwithan
outside creditor."'4What the privatelaw model assertsis that in more
189
190
191
192
Ibid. at 41.
Dias, supra note 2 at 267.
Hart, supra note 188 at 41.
C.A. Auerbach, 'On Professor H.L.A. Hart's "Definition and Theory in Jurisprudence" (1956) 9J. Leg. Ed. 39 at 44 fromHart, supra note 188 at 42-4.
193 Auerbach, supra note 192 at 45.
194 But one wondersifHart was not overstatingthe simplicity
of even thistypeof situation
given that the problems of ultraviresand pre-incorporationcontractsstill plagued
210
relations,
complex situationssuch as veil-piercing,parent-subsidiary
take-overbattles,or shareholderclaims of oppression- the simple metaphor is harmfuland leads to seriouslyerroneous conclusions. In these
situations,the 'legal person' metaphormustbe dropped and the underlying jural relationsand contractualexpectationsof the natural persons
involvedmustbe explored. Since theorganizingthemeofa 'separatelegal
person' does not reallyhelp to solveanyof these modern legal problems,
and is itselfamended by modern statutoryinterventionsto increase its
it is submittedthatthirty-year-old
claimsas to itsfunctional
usefulness,"'!"
are
less
the
persuasive.Thus,
privatelaw model does not
simplicity today
'too
as
Hart
but
rather
much,'
claimed,
give
onlywhatis necessaryto reach
a properunderstandingof thiscomplicatedphenomenon.
This bringsus to Hart's second argument:thatthe privatelaw model
gives us too littleand therebyfails to explain the law as it is presently
formulated.'~"In other words, while the theoryis analytical,it is not
descriptive."'7The answer to this objection is that when the law is as
radicallyincoherent as our presentsystemof corporate law, it would be
follyto tryto explain it in the termsin which it currentlypresentsitself.
While Hart and manyscholars may be content to describe the law as it
appears the privatelaw model's purpose is different.It triesto unifythe
underlyingprinciplesof the statutesand case law into a coherent whole
thatcan subsequentlybe used tojustifyfutureoutcomes or conclusions
of law. Through thisprocess,courtscan be givengenuine guidance as to
how theyshould solve corporatelaw problems beyond merelyfollowing
the words of precedent and workingout analogies withnaturalpersons
In doing so, however,the privatelawmodel is more descriptive
willy-nilly.
and predicativethan firstappears. As willbe seen withthe discussion in
Part III, the privatelaw model can justifythe outcomes of the foundational corporatelaw cases on a more solid and coherentfoundation.
In furtherresponse to Hart's second argument,one can saythatHart
himselfgives too little.His analysisgives no principled reason whythe
legal rulessurroundingcorporationsshould be constructedbyanalogyto
natural persons or howfar these analogies should be taken."98 If his
answer to whyis solelythat thisis the waythatit has alwaysbeen done,
Englishcorporate law at the timehe was writing,see forexample,
Ashbury
Ry.Carriage&
Iron co. v. Riche(1875), L.R. 7 H.L. 653; Kelnerv.Baxter(1866), L.R. 2 C.P. 175 (Ct.
C.P.).
195 See, forexample,C.B.C.A.,ss. 14, 15, whichdeal withthe problemsof pre-incorporation

and ultravirescontractsrespectively.
196 This theme is picked up in some of the jurisprudence texts, see R. Wacks,
4th ed. (London: Blackstone,1995) at 257.
Jurisprudence,
197 Dias, supra note 2 at 267.
198 Hart, supra note 188 at 44 himselfargues thatthisis 'a debatable legal issue.'
thisis a farfromsatisfactory
principledreason forthe impositionof legal
liability.Likewise,the mere factthatthe inanimatecollection of property
is called a legal person cannot decide the issue. We could instead call it a
As GregoryMarkargues,
'rightand dutybearing' unitor a 'quasi-trust.'199
have
been
seen
as
could
analogous to eitherindividualsor
'Corporations
these
analogies could have been rejectedand
governments.Alternatively,
theoristsand policy-makers
could have developed an entirelynew bodyof
law to supersede contemporarydoctrine.'200
Withoutanyjustificationat
the centreofHart's theorybeyondpositivismitis reasonable to askwhythe
and personality
analogyis notmade withanimals,201thelegal responsibility
ofchildren,202or the rulesthatpertainto thestateand government.20?
While Hart's theorymaynot be able to answerboth problemsof 'why'
and 'how far,'the privatelaw model can do so. It provides a principled
reason why the legal rules surrounding the corporate patrimonyare
oftenanalogized to those thatapplyto individuals.This is due to the fact
that the contractual relations and agreements between the natural
persons involvedcreate the illusion that the corporation is acting in a
fashion similarto a natural person. Thus, we can speak of a 'corporate
agent' because the effectof the corporatecontractsis to give the factual
appearance that the corporate patrimonyis a principal. In response to
the second problem,thatdealing withthe scope of these analogies, the
private law model suggeststhat these can only be taken as far as they
correspond to the effectsof the underlyingcorporate contracts.When
the analogy and the private law model differ,the analogy must be
abandoned. Thus, it is submittedthat the privatelaw model is able to
meet Hart's criticismsand is in facta more satisfactory
wayof examining
the legal nature of the corporation.
Having examined the more detailed objections to the private law
model outlined above, it is now necessaryto finishour inquirybyquickly
showing how the privatelaw model differsfrom the two other major
contractual theories of the corporation: the economic 'nexus of contracts'and the traditionalEnglishmodel.
199 See B. Smith,'LegalPersonality'
(1928) 37Yale L.J.283 at 283.
200 G.AMark,'The Personification
oftheBusinessCorporation
In American
Law' (1987)
54 U. Chi.L. Rev.1441at 1445.
201 If corporations
cannotactwithout
ascribingto themtheactionsofnaturalpersons
and are thusinanimatewithno moralpersonality
as Hart,supranote 188 at 42-3
seemstoargue,doesn'ttheanalogywithanimalsseemappropriate?
thesolutionofProfessor
202 Thisissometimes
see Corporate
Law,supranote8 at
Welling,
c. 3.
203 Does not the hierarchicalstructureand power-wielding

abilityof these vast
morecloselyresemblethestatethana person?See M. Stokes,'Company
patrimonies
Law and Legal Theory'in LegalTheory
and Common
Law,ed. W. Twinning(Oxford:
BasilBlackwell,
1986) 155at 177ff.
212
3. DIFFERENTIATING THE PRIVATE LAW MODEL FROM OTHER CONTRACTUAL

MODELS
At firstglance, the privatelaw model of the corporationherein proposed

seems essentiallysimilarto economic theory.Both theoriesposit thatthe
corporation is simplya 'nexus of contracts'between the various actors,
thatthereis no such thingas a legal person,and thatlimitedliabilityis by
far the most importantattributeof the corporation.While the conclusions reached by the two theories share some similarities,there are
significantdifferencesthatdemand highlighting.The firstmajor difference is that the two theoriesare approaching theirsubject matterfrom
totallydifferentperspectivesand disciplines. Thus, the economist is
offeringan explanation of the firm'spurposeratherthan delimitingits
keyconcepts. Questions posed bythe economistare posed as a legislator,
who asks, 'What rules would it be efficientto make?'2"4Instead, the private law model poses and answersinquiries as a lawyeror adjudicator,
asking,'Whatruleswould be mostcoherentgivenwhatour legal systemis
alreadycommittedto?'205
The second difference,which is directlyrelated to the first,is that
both economists and lawyersuse terms such as contract,agent, and
principal in completelydifferentmanners.2""Thus, for the economist,
contracts can be hypotheticallyimposed between two idealized value
maximizers protectingall sorts of expectations, rather than being a
legally binding agreement between two natural persons supported by
considerationor cause.2"'Thus, greatdifficulty
ensues when one triesto
'translate'
the
economic
actually
understandingsof the partiesinto legal
contracts.208 Is the corporation merely the 'core contracts' between
shareholders,directors,and officers?Are bondholders, customers,and
beneficiariesto the core contract?Are all the
employees third-party
bondholders,
customers,and employees,jointobligeesparties,including
or
mutual
Unless
one startsfroma legal framework,
obligors
agents?2.9
these questions are virtuallyunanswerable through the application of
205 Ibid. at 378.
206 See V. Brudney,'Corporate Governance,AgencyCosts,and the Rhetoricof Contract'
(1985) 85 Colum. L. Rev. 1403 at 1403-4; W.W. Bratton,'The "Nexus Of Contracts"
Corporation:A CriticalAppraisal' (1989) 74 Cornell L. Rev. 407 at 447.
207 On the economic theoryof contracts,see Cheffins,supra note 3 at PartI, c. 5.
208 See J.A. MacKerron, 'Shareholder DerivativeLitigationand the Nexus Of Contracts
Corporation' (1992) 40 U. of Kans. CityL. Rev. 679 at 719 ff.who experiences this
translationdifficulty.
209 Ibid. at 719-20.
CANADIAN CORPORATE LAW
213
economic theory.Thus, despite its supposed 'contractual' nature, the

theoryespoused by the economist is more a theoryof the 'firm'resting
on that science's foundationsthan a legal explanation of the corporation.21"Economists maybe able to tell us what is prudent and efficient
but theycannot tellus whatisjust or owed as a matterof right.Although
helpful to the legislator (if one accepts its basic premises), economic
In contrast,the proposed private
analysisis of littleuse to the courts.211
law model strivesto be usefulto the adjudicatorbyhelping her solve the
difficultdoctrinalquestions posed bycomplicatedcorporatedealings.
While the economic approach and the contractual model herein
proposed are in some respects profoundlydifferent,the private law
model also differsfrom the contractual model inherited from Great
Britain.22This influential'contractual' model of the company findsits
foundations in s.14 of the CompaniesAct (UK), which states that the
memorandum and articles of association, when registered,bind the
company and its members as thougheach had signed them and covenanted to bind all futureholders.This allusion to agreementis said to establishthe contractualnatureof the Englishmodel.213When one examines the case law surroundingthismodel, however,one soon sees thatit
does not take its contractual nature seriously.Although the English
model is rife with such contradictions,214
one example will sufficeto
illustrate.This example can be found in thatbody of case law surrounding the abilityof the shareholders to enforce the corporate contract.
Althoughtherehas been much debate among academic commentators215
the general rule is thatthe memorandumand articles,bestowrightson
210 On the basic principlesunderlyingthe economic analysisof law,see F.H. Buckleyet
al., supra note 69 at c.1; Cheffins,supra note 3 at c.1-5.
211 'Regulation,' supra note 8 at 461. See also, PrivateLaw, supra note 11; R. Dworkin,
Law's Empire(Cambridge: HarvardUniversity
Press, 1986); P. Benson, 'The Idea of a
Public Basis ofJustification
forContract' (1995) 33 Osgoode Hall L.J.273.
212 This model is stillthe basis of the BritishColumbia, Prince Edward Island, and Nova
Scotia corporationstatutes,interalia, see Canadian, supra note 84 at 192-3.
214 As ibid. at 426 argues: 'There is an obvious logical tension in the English model
between itsclaims thatthe corporationis a contract,the corporationis the majority,
and the corporationis actuallya separate person witha will.As presentedand applied
in English law, the ideas are not wholly compatible and the model is, as a
consequence, radicallyincoherent.For example, ifthe corporationis a contract,then
whydoes not the minorityshareholderwho is harmed bythe director'sbreach have a
right to enforce it? Or, if the corporation is a separate legal person from the
shareholdersforthe purpose of limitedliability,then how can the shareholdersratify
- as though theywere principals- the wrongsof directors?'[citationsomitted].
215 For a summaryof thisdebate see Gower's,
OF TORONTO LAWJOURNAL
214 UNIVERSITIY
the shareholder only in her 'capacity' as shareholder.216

Therefore,the
shareholder typicallycannot sue to enforce'outsiderrights'217
nor rights
thatdeal withone's statusas, forexample, a directoror officer.~18
On closer examination,these limitson the rightof shareholdersare
impossible to square withthe idea thatthe English model is contractual.
Under the common law systemof contractlaw, a breach of any termis
actionable by the innocent party,who mayalwaysseek a remedyforthe
violation of her rights.219Either the articles and memorandum are an
enforceable contractor theyare not; a rational and coherent systemof
law cannot have it both ways. In contrast to the English model, the
privatelaw model of the corporationtakesitscontractualnatureseriously
as an organizingprincipleand does not place arbitrary
and thusincoherent limits on the parties in their enforcementof contractual rights.
Instead, the privatelaw model enforcesall the termscontained in the 'D'
and 's' contracts.22"
Thus, although both the English and private law
models are said to be contractual,only the privatelaw model trulylives
up to thisclaim.
In sum, having outlined the contractualrelationsthat constitutethe
corporation, answered specific doctrinal questions, and addressed
traditionalcriticisms,one can claim thatthe privatelaw model providesa
plausible theoryof the corporation that explains all of its traditional
attributes.Furthermore,the fact that such a theoryexists reveals that
continued reliance on the black-letter
doctrineofthe legal person,which
renders our corporate doctrine incoherent,is no longer necessary.The
onlyremainingtaskthen is to see whetherthe privatelaw model is in fact
usefulbytestingit on a complex body of case law; in thisinstance,those
cases thatare said tojustifypiercingthe corporateveil.
216 Compare Hickmanv. KentorRomney

MarshSheep-Breeders'Assoc.,
[1915] 1 Ch. 881 with
Salmonv. Quinn & AxtensLtd., [1909] 1 Ch. 311 (C.A.).
217 Term was coined by L. Wedderburn, 'Shareholders' Rightsand the Rule in Foss v.
Harbottle'(1957) C.L.J. 193.
218 See Eleyv. PositiveGovernment
Security
Life(1876), 1 Ex. D. 88 (C.A.) (employee cannot
enforceclause thatensured thathe was to be the company'ssolicitorforlife) or Beattie
v. E &FBeattie Ltd., [1938] Ch. 708 (C.A.) (invocationof arbitrationclause contained
in the articleswas not allowed as thisdealt withperson's capacityas a director).
219 Cheffins,supra note 3 at 456.
220 Assumingof course that theywould be enforceable as a matterof general contract
law.
III Theveil-piercing
casesre-examined
In Part I this paper argued that Canadian corporate law, as currently
formulated,is radicallyincoherent. In Part II, it hypothesizedthat the
central principle of this body of law is that a corporationis a nexus of
contractsbetweennaturalpersons.In lightofthisargument,the purpose
of PartIII is to testthe privatelaw model on the veil-piercingcases to see
ifit is able to answer,coherentlyand analytically,
the questions raised by
these factpatterns.Given thisfocus thissection will thereforeexamine
how these cases interactwith the limited liabilityof key participants,
rather than asking what theytell us about the 'legal person.' Furthermore, since limitedliabilityis key,other cases not traditionallyincluded
under veil-piercing,
such as thosedealingwiththe liabilityofdirectorsfor
willalso be examined. The argumentof this
corporatemisrepresentation,
section is thatthereis nothingexceptionallydifficultabout these cases nothing,that is, besides the confusingrhetoric.When the cases are reexamined using the privatelaw model, one findsthatcourtsare holding,
or in some cases shielding,natural persons fromliabilityfor the same
reason that theyuse to justifytheirdecisions in the non-corporatelaw
context.If the participantshave breached a contract,committeda fault,
or been unjustlyenriched, then liabilitywill be imposed. Conversely,if
theyhave done none of these thingsor have contractedforan exclusion,
liabilitywill not be imposed. The argumentis thatsimple. It shows that
the corporate formis not some sortof privilegethatis shieldingpeople
fromthe liabilitiesimposed bycommon law.221
For the sake of simplicitythe analysiswillbe grouped into the following categories: Legislative Interventions, Statutory Interpretation,
Agency,Fraud or Mere Facade, and Tort.A word of caution, however,is
in order. To keep thispaper to manageable proportions,thissectionwill
not examine all the cases or situationsthatare sometimesassociated with
piercing the corporate veil. Instead it will look at the classic and most
recentauthorityand minimizeitscoverageofotherareas. For example, it
will not look at the issue of 'undercapitalization,'as thisis of less importance in the Canadian and Commonwealthcontext in comparison with
the other categories.222
Furthermore,thissection will not examine the
221 See contra'Agents,'supra note 33 at 32 ('Corporate legislation,it mustbe recognised
creates a fictionwhich,in effect,detractsfromthe manifestprincipleof the common
law thata person is responsibleforthatwhichhe does or authorizes.').
222 Most Canadian casebooks have a limiteddiscussion based on the American case of
v. Carlton,276 N.Y.S. 2d 585 (C.A. 1966) (undercapitalisationdenied as a
Walkovsky
justificationforveil-piercing),see Cases & Materials,supra note 40 at 202.
issues of parent-subsidiary
relationsor enterpriseentityin any in-depth
manner.This is done not because the categoryis unimportant,but rather
because such an examinationrequiresmore space and argumentthan is
With
possible here and raises issues beyond the scope of thisinquiry.22"
thatcaveat made knownthe re-examinationcan begin.
A. LEGISLATIVEINTERVENTIONS
Quite often,forreasons of public policy,the legislatorwill act to render

persons liable foractions that under the regimeof privatelaw would be
unactionable. Similarly,the legislatormayuse her power to instructthe
courtsto ignore,reinterpret,
or renderunenforceablethe legal relations
and contracts(nominate or otherwise)thatnaturalpersons have in fact
Even withinthe field of corporate law itselfthe limited
constructed.224
of
liability participantspredictedbythe privatelaw model is bounded by
provisions of the C.B.C.A. Thus, the C.B.C.A. s.119 imposes liability on
directors,jointlyand severally,forup to six monthsof back wages owed

to employees.225
But thisis not unusual and no one would deny thatthe
has
the
legislator
abilityto 'demand that courts ignore all the conceptions and principlesthatare at the root of companylaw.'226
Much like the traditionalview,then,the privatelaw model recognizes
thatthe legislatorcan and willalter the corporatecontractin pursuitof
public policy. In contradistinctionto traditionalwritingon the subject,
however,the privatelawmodel does not worrywhetheror not these types
of interventions'pierce the corporateveil.' Instead, the analysisherein
223 One such question is whetheror not the legislatorshould recognize a new 'nominate'
contractor body of law to deal withthe issue of parent-subsidiary
relationsas has been
done in the German legal system,see N.C. Sargent, 'Corporate Groups and the
Relations in the
Corporate Veil In Canada: A PenetratingLook At Parent-Subsidiary
Modern Corporate Enterprise' (1988) 17 Man. L.J. 156 at 181. Furthermore,most
group enterprisecases have more to do withstatutoryinterpretation(see discussion
below) or breaches of director'sdutiesto shareholdersand creditorsthanwithattacks
on the limitedliabilityperse see forexample,ScottishCo-operative
Wholesale
Ltd.v.
Society
Meyer,[1959] A.C. 324 (H.L.); Sargent,158 ff.
224 A classic example is StatuteofFrauds,R.S.O. 1990, c. S.19 (any contractforthe sale of
land thatis not in conformity
withitswritingrequirementis unenforceable). See also
Canada IncomeTax Act& Alpplication
Rules,R.S.C. 1985 (5th Supp.), c. 1. [hereinafter
Canadian Tax Act] s.68 (tax authoritiesallowed to ignore the way parties may have
chosen to allocate the total considerationin a contractand substitutea 'reasonable'
allocation forpurposes of calculatingincome).
225 See also, O.B.C.A.,s.131. For a listof the range of liabilitiesthatdirectorsface,see M.
and Officer's
Duties and Liabilitiesin Canada (Markham, ON: ButT6trault,Director's
terworths,1997) at 21 ff.The United Kingdom has regulateddirectors'conduct to an
even greaterdegree, see Insolvency
Act(U.K), 1986, c. 45, s.213, 214 (Fraudulent and
Act(U.K.), 1986, c. 46.
Wrongfultrading)and the Company
Directors
Disqualification
226 Bank voorHandel en Scheepvaart
[ 1953] 1 Q.B. 248 at 278.
N.V.v. Slatford,
proposed viewsthemforwhattheyreallyare - attempts,perhaps drastic

or sloppy,to enforcea provisionof public policythroughthe regulation
of privateordering.Although these typesof provisions may affectthe
defaultregimeoflimitedliability,
have little
thesejustifiedredistributions
to sayto thejuristabout how limitedliabilityshould be understoodfrom
a privatelaw perspective.
B. STATUTORY INTERPRETATION
When one closelyexaminesmanyofthe mostoft-cited

veil-piercingcases,
it becomes clear that a large proportionof them have more to do with
statutoryinterpretationthan with the examination of problems surrounding corporate law.227This becomes especially clear when these
cases are viewednot fromthe rubricof whattheytellus about the 'legal
person' but ratherhow theyinteractwiththe limitedliabilityprovidedby
both the 'D' and 's' contracts.When thischange of paradigmis adopted,
one thingbecomes immediatelyclear. Since there is in factnot a 'legal
person' onlya corporatepatrimony,the courtsare neverprohibitedfrom
examiningthe factualcircumstancesand innerworkingsof 'the corporation.' Thus, those who have argued thatit is illegitimateforthe courtsto
merely 'examine' have been led astrayby the traditionalincoherent
doctrine.When thisnewviewis taken,thesejudgements can be seen as a
combination: (a) in unequal partsof 'lettingoffsteam' by thejudiciary,
that is obiterdicta,in the face of an unwelcome or difficultlegislative
intervention22';
(b) and/or a purposiveinterpretationof a specificstatuscheme.2211
tory
Perhaps the most influentialof these typesof cases can be found in
the triumphrateof Englishcases dealing withthe applicationof narrowly
worded expropriationstatuteswhose compensationvaried according to
the statusof the occupant. In Smith,Stone& KnightLtd.v. Birmingham,230
D.H.N. Food Distributors
Ltd. v. TowerHamletsL.B.C.,23'and Woolfson
v.
the
courts
were
asked
to
of
these
R.C.,232
Strathclyde
interpret
types
legislativeinterventions.Typically,under the relevantstatutes,less (or
nothing) was givento a mere tenantand more to thosewho were evicted
frombusinesspremiseswhichtheyowned. The problemwas thatin many
situations the legal ownership of the propertyand the business were
divided using the corporate form.Thus, on one interpretationof the
statuteno compensationwas to be givento arguablyworthyplaintiffs.
In
227
228
229
230
231
232
Goddard, supra note 35.

Corporate
Gower's,
(Cityof),[1939] 4 All E.R. 116 (K.B.) [hereinafterSmith,Stone& Knight].
[1976] 2 All E.R. 462 (C.A.) [hereinafterD.H.N. Food].
(1978), 38 P.; C.R. 521 (H.L.).
order to reach the 'just' and 'purposive' result, some of the courts
attempted to use an amalgam of broadlyworded veil-piercing,agency,
and group enterprisetheoryto justifytheirmore comprehensivestatutory interpretations.Due to the expansive language used, a whole
generationof common law cases was needlesslyconfusedas thesejudicial
statementswere repeated as generalprincipleratherthanbeing properly
confined to theirstatutorypurpose.'"2While these are the most famous
English mistakes,other prominenttextbookexamples of where English
courts, and Commonwealth academic commentators,have mistakenly
confusedveil-piercingwithstatutory
interpretationcan also be found in
DaimlerCo. Ltd.v. Continental
and
Tyreand RubberCo. (GreatBritain)Ltd.234
ReF.G. (Films)Ltd.235
Unfortunately,there are also many examples of these over-broad
statutory
interpretationcases froma Canadian perspective.For example,
in De Salaberry
RealtiesLtd. v. M.N.R.2" the court was charged withproperlyinterpretingthe Canadian Tax Actto see ifa sale of land should be
deemed a 'capital gain' (withconcomitantlarge tax savings) or as 'income.' In tryingto reach a properdecision on the basis of the statute,the
court examined the relationshipof the groupsof companies to interpret
whetheror not, on all the evidence, the business of the subsidiarywas
thatof a traderin land. In the end, the courtcame to the conclusion that
the subsidiarywas tradingin land and thatbecause the propertysold was
'inventory,'the proper characterizationof the proceeds was as 'income.'
Rather thanjust basing his decision on 'the course of conduct' of which
he had 'no doubt,'2"37thejudge wenton forpages justifyinghis piercing
of the corporateveil on other tax and statutory
cases whichspoke of the
lack of separatewillor agencyof the subsidiary.238
The subsequent debate
233 Althoughmuch incoherence was caused bythese pronouncements,theEnglishcourts
have now come to see the case in a manner similar to the private law model. See
Adamsv. Cape Industries
plc, [1990] Ch. 433 (C.A.) at 536 [hereinafterAdams] ('The
relevantpartsof thejudgements in the D.H.N. case must,we think... be regarded as
decisions on the relevantstatutoryprovisionsfor compensation, even though these
parts were somewhat broadly expressed....') or YukongLine Ltd. v. Rendsburg
Investments
Corp(No. 2), [1998] 1 W.L.R. 289 (Q.B.) at 304 [hereinafterYukong]('It
seems to me thatthe same observations[of the Court ofAppeal in Cape] applyto the
decision in Smith,Stone& Knight.').
234 Supra note 59 (company was an enemy alien for the purposes of the relevant
legislationas all the shareholdersand directors,except one, were German citizens).
235 [1953] All E.R. 615 (Ch. D.) (film does not qualifyunder the relevant act since
English involvementis negligible).
236 (1974), 46 D.L.R. (3d) 100 (F.C.T.D.) [hereinafterDe Salaberry].
237 Ibid. at 105.
238 See, for example,AluminumCo. of Canada v. Toronto(City of), [1944] S.C.R. 267
[hereinafterAluminum];FamousPlayers,
supra note 41.
then became if or when, as a generalrule,the courts may pierce the

corporate veil in parent-subsidiaryrelations.2"'Yet, when properly
characterizedthis case stands for littlemore than the proposition that
the courtscan look to all the factswhen tryingto characterizeproceeds
as 'income' or 'capital gain' under the Canadian Tax Act.Beyond this
example, Canadian law is fullof cases thatare sometimescited as dealing
withveil-piercingbut which instead are just examples of statutoryinterpretation.Some of these cases include PalmoliveMfg.Co. (Ontario)Ltd.v.
TheKing,24o
Toronto(Cityof)v. FamousPlayersCanadian Corporation
Ltd.,241
AluminumCo. ofCanada v. Toronto,242
Estatev.
Nova
and
Scotia,243
ReJodrey's
Nedco Ltd. v. Clark.244
Once again, when these statutorycases are reexamined one findsthattheysay littleabout traditionalveil-piercingin
non-statutory
settingsand nothingabout how to understandthe regime
of limitedliability.245
C. FRAUDOR 'MEREFACADE'
Much like the other categories of veil-piercing,this area has been

hopelessly confused by the incoherence of our currentcorporate law
doctrine. As ProfessorFarrarargues, even in the classic frameworkthe
use of such language as fraud or facade 'does littlemore than implya
value judgement of disapprobation.Most cases are in fact examples of
fraud in the broadest sense. Beyond this theyrepresentan inarticulate
When the
attempt to mark the limitsof legitimateincorporation.'246
classic cases in thiscategoryare examined fromthe point of viewof how
theyeffectlimitedliability,however,one immediatelynotices how little
theyactuallyhave to say on the matter.While theymay constituteveilpiercing on the mistakenexpansiveview,when viewedfromthe private
law model's perspectivetheyare reallynothing more than the proper
enforcementor interpretationof contracts.247
239 See Cases & Material,supra note 40 at 191-3.

240 [1933] S.C.R. 131.
241 Supra note 41 (profitgained throughdividend fromsubsidiariesis business income
forthe purposes of municipal taxationstatute).
242 Supra note 238 (income of subsidiaries is business income for the purposes of
municipal taxationstatute).
243 [1980] 2 S.C.R. 744 (shareholders of parent company considered successors of
bequeathed estatedue to.itsfactualcontrolof subsidiary).
244 Supra note 30 (strikingworkersallowed to picket subsidiary'spremise on basis of
relevantlegislation).
245 For a similarview,see Goddard, supra note 35 at 61.
246 Farrar's,supra note 40 at 72 [citationsomitted].
247 This is consistentwiththe opinion of Cooke, supra note 43, who argues that these
cases do not violate the principleof Salomonv. Salomon.
Of all the veil-piercingcases in this category,perhaps GilfordMotor

In that case, the plaintiff
Home Co. Ltd. v. Homneis the most famous.248
as
its
director.
In his contractof
managing
company employed Horne
was
a
non-solicitation
that
was
to
servicethere
clause
preventHorne from
or
interferingwith, endeavouring to entice away,any of the company's
Afterresigningfrom the company, Horne
customers post-contract.249
sent circulars and incorporated a company to carryon a competing
business. Horne was then employed as the new company's de facto
managing director.In the order to reach his decision, Lord Hansworth
argued that the companywas a 'mere cloak or sham' designed to allow
Horne to defeat the covenant. To stop this breach the learned judge
thereforeissued injunctionsagainstboth Horne and the new company.
Thus, this case came to stand for the proposition that the court may
pierce the veil when the companyis a 'sham' or 'fraud.'210
When viewedfromthe perspectiveof the privatelaw model, thiscase
reallyhas nothing to do witheither narrowveil-piercingor violationsof
limitedliability.The analysisis straightforward.
Horne promised not to
a similarcompanyand actedas itsmanaging
compete or solicit.He formed
director.What was he doing ifnot competing?There is no doubt thathe
was violating the covenant. This conclusion flowseven if a traditional
view of the corporation is taken and is irresistibleif the corporation is
seen as merelya patrimonyof assetsand liabilities.2"'In order to stop the
ongoing breach, the court needed to issue an injunctionagainst Horne
thatrequired him to stop havinganymanagerialcontrolof the company
or committingany otheract thatwould breach the contract.The injunctionon the companycan be justified,on the privatelaw model, as serving
as a surrogatefor an injunctionon Horne's wifeand accomplices, who
were knowinglyassistinghim in his breach. Thus, the privatelaw model
shows the 'foundational' case of 'veil-piercing'to have been just an
example of a properlyinterpretedcontractfollowedbya well-formulated
remedyforitsbreach.
Anothercase of 'veil-piercing'thatshowsmuch of the fraudcategory
to be littlemore than contractualinterpretationis Big BendHotelLtd. v.
Mutual CasualtyCo.252 In thatcase, the corporationentered into
Security
an insurance contract for a hotel it owned. The hotel subsequently
burned to the ground. The insurance company raised as a defence the
factthatthe corporationdid not disclose a materialrisk.In thiscase, the
248 [1933]Ch. 935 (C.A.).
249 Ibid.at 935-6.
250 See Jonesv. Lipman,[1962] 1 All E.R. 442 (Ch. D.) [hereinafterJonesv. Lipman]; Big
BendHotelLtd.v. Security
Mutual CasualtyCo. (1980), 19 B.C.L.R. 102 (S.C.).
251 Goddard, supra note 35 at 61.
252 Supra note 250.
riskwas thatitsprincipleshareholderand president,Kumar,had been in

a similarpositionwithanothercorporationwhose hotel had also burned
to the ground. Since all insurance contractsdepend on 'utmost good
faith'and because failureto disclose a materialriskrendersthe contract
void, the conclusion mustbe reached that the contractwas void on the
issue of material risk.2YYet, in order to reach his conclusion that the
insurancecompanydid not have to pay,thejudge 'pierced the corporate
veil' in order to saythatthe corporationhad to disclose the presence of
Kumar as a materialrisk.Once the privatelaw model is employed, the
need and the temptationto confuse the issue of contractualinterpretation with the use of veil-piercingterminologyare gone. The answer is
simple. On the proper interpretationof the insurance contract the
directorsshould have disclosed, as a materialrisk,the fact that Kumar
was president. The interpositionof the corporate patrimonydoes not
change thisfact.Furthermore,thefactthatthe insurancepolicywas held
void does not affectthe limitedliabilityof eitherthe directorsor shareholders as theyare not now personallyliable forthe damage to the hotel.
Shareholders are only responsible for the loss to the extent of their
contributionto the corporatepatrimony.Beyond thisexample, thereare
EconomicDevelopment
many others cases, such as Saskatchewan
Corp.v.
MotorsLtd.,255Harold
Patterson-Boyd
Mfg. Corp.,254Creaseyv. Breachwood
Holdsworth
& Co. Ltd. v. Caddies,256and ManleyInc. v. Fallis,257that are
more properly understood as instances of contractual interpretation
where the courts have confused the true basis of their intervention
because of the incoherentdoctrineand veil-piercingterminology.
While this 'mere interpretation'view of the aforementioned'fraud'
cases is coming to be seen as orthodox in the United Kingdom, what
gives thissection anyreal significanceis thatthe English courts'25 and its
have all come to the conclusion that 'mere facade'
leading textbook25D'
(i.e., where assets are removed from a corporate patrimonyto deny
creditorsan effectiveremedyin eitherequityor common law) is the only
'real' exception to the Salomonprinciple under which the courts are
occasionallypermittedto pierce the corporateveil.21
253
254
255
256
257
258
259
260
See Corporate
Law, supra note 8 at 121-2.
[1981] 6 Sask. R. 325 (C.A.).
[1993] B.C.L.C. 480.
[1955] 1 All E.R. 725 (H.L.).
(1977), 2 B.L.R. 277 (Ont. C.A.).
See Adams,supra note 233 at 539.
Gower's,
supra note 9 at c. 8.
See J. Payne, 'LiftingThe Corporate Veil: A Reassessmentof the Fraud Exception'
(1997) 56 C.L.J.284.

A classic example of this occurred in Jonesv. Lipman.261
In that case,
Sometimeafterthe
Lipman agreed to sell a parcel of land to the plaintiff.
contractwasmade Lipman changed hismindand transferred
the land to a
corporation to defeat any action for specificperformance.In order to
undo this fraud, the court 'pierced the corporate veil' and ordered a
decree of specificperformanceon both the transfereecorporationand
wasregularized.
Lipman. Thus, the 'mere facade' categoryofveil-piercing
When these facts are examined using the privatelaw model, it becomes clear that this case is no differentfrom the other contractual
interpretationand enforcementcases. In other words,it has absolutely
nothing to do withviolatingthe limitedliabilityof any corporate actor.
On all the factsthe court came to the conclusion that Lipman was in
effectivecontrolof the property,and therefore,thatan order of specific
performancewould be valid againsthim because he had effectivemeans
to carryout the order.262
Furthermore,even if the corporate patrimony
had not been under Lipman's control,the courtmighthave nullifiedthe
hurtfulaction byattackingor rescindingthe deal as a fraudulentconveyance263and then issuing the specificperformanceorder.264Thus, the
privatelaw model replicates the court's conclusion thatspecificperformance cannot be defeated in this manner without the 'unnecessary
mysticism'given by the court for the second specific performance
Furthermore,thisreasoningshowsthatthereis nothingmore to
order.265
the 'mere facade' categorythan the proper enforcementof a contract.In
any event,it also showsthatthe limitedliabilityof the shareholdersand
directorsof the transfereecorporationwould not have been touched.
Another example of this type of fact pattern can be found in the
recent decision of YukongLine Ltd.v. Rendsberg
Investment
Corp.(No. 2).266
The factsof thiscase can be summarizedin the followingmanner. The
plaintiffbrought an action againstY, and companies R Co. and L Co., of
which Y was the ultimatebeneficialowner and a director.The plaintiff
had made a charter-party
contractwith R Co. throughY acting as its
agent. Soon afterit was made R Co. repudiated the contract due to a
261 Supra note 250.
262 Gower's,
supra note 9 at 171 ('specificperformancecannot be resistedbya vendorwho
has absolute ownershipand control of the company in which the land is vested');
Mayson,supra note 35 at 135.
263 See FraudulentConveyances
Act,R.S.O. 1990, c. F.29, s.2 ('Every conveyance of real
propertyor personal property... made withintentto defeat,hinder,delay or defraud
creditorsor others of theirjust and lawfulactions, suits, debts, accounts, damages,
are void as againstsuch persons and theirassigns.').
penalties or forfeitures
264 Ottolenghi,supra note 34 at 351.
265 Mayson,supra note 35 at 135.
266 Supra note 233.
change in marketconditions.On the dayof the repudiationall the funds

to L Co. Then, R Co.'s
fromthe bank account of R Co. were transferred
bank account was subsequentlyclosed. In lightof the facts,the plaintiff
made three argumentsfor recoveryfromY: agency,veil-piercing,and
conspiracy.
In response to the agency argument, the court found that it was
impossibleto hold thatY was the principaland R Co. was his agent given
that the contractexplicitlystated the opposite. Furthermore,the court
denied any general applicabilityof the Smith,Stone& Knighttest.267In
response to the veil-piercingargumentand afterreviewingthe authorities, the court held that there was nothing in the transferthat would
renderY liable forthe charter-party
contract.No veil-piercingcase stood
forthispropositionof substitution,
as opposed to theiruse as a means of
interpretation.Since all had agreed that R Co. should be charged with
the liabilityfordamages, the courtheld thatis how thingsshould remain.
In response to the third argument,that Y and other associates had
directlyconspired to defraud the plaintiffsof their remedy,the court
argued thatin orderforthereto be an action forconspiracy,the underlying unlawfulact mustbe actionable by the plaintiff.In thiscase, whileY
had breached his fiduciarydutyand therebyharmed the position of the
creditors,he did notowe thefiduciarydutiesdirectlyto them;rather,such
dutieswere mediated throughthe company.The claim of the plaintiff
on
thiscount thereforealso failed.Respondingto theargumentthata lack of
remedyin these circumstancesmightshow the law in an unfavourable
light,the courtsuggestedthattheremightbe tworemediesavailable.2"8
The firstremedysuggestedwas the appointmentof a liquadator forR
Co. When this had occurred, the court argued that Y would have no
answer to a claim broughtby the liquadator for breach of his fiduciary
duty. Therefore, when the money was paid back into the corporate
would receivefullpaymentthroughthisprocess
patrimony,the plaintiffs
as theywere the only creditors.The second remedysuggested by the
courtwas thatit mighthave used itsinherentpowersto issue injunctions
to require Y to use his position of dominance in L Co. 'to get back from
himselfthatwhichhe had caused to be paid forhis benefit.'2"'M
But since
eitherside did not argue this,the courtwould not impose such a remedy
of itsown motion.Once again we have a situationwherethe courtalmost
comes to the rightconclusion but is misled by the traditionaldoctrine
into refrainingfromdoing thatwhichit clearlythinksis right.
267 Yukong,
268 Ibid. at 314-5.
269 Ibid. at 314.
On application of the private law model, we can see both what the
courtgot rightand how the case should have been dealt with.Clearly,the
courtwas correctin assertingthatthe factsdid not warrantthe principalagent analysisas between R Co. and Y. Furthermore,the court was also
correct in denyingthe veil-piercingremedy.The agreement between Y
and the plaintiffclearlycontemplatedthatthe plaintiff
would look solely
to R's corporate patrimony.They had agreed to a limitedrecourse term
and should be held to theirpromise. It is submitted,however,thatthere
are two coherent solutions to this fact pattern.The firstof these is to
attack the transactionas fraudulent,rescind the transfer,and replenish
the corporate patrimony.When this is done, all partieswould receive
theirproper compensation provided thatthe moneycan be found. The
second solution,which is especiallyeffectivewhen the moneycannot be
returned,is to allow a suit directlyagainst the directorforbreach of his
fiduciaryduty.If the privatelaw model is correct,Y also promised the
plaintiffthat as R Co.'s director he would maximize the NPVof the
patrimonywithcare and loyalty.Instead,he stole the moneyin breach of
this duty.Therefore,Y is liable to the creditorsand must compensate
each of them according to their loss. The only reason the court is
confused is that of the incoherent doctrine of 'legal person.'270 It is
contended thatthisdual analysisbased on rescindingfraudulentconveyances and allowingcreditorsto enforcethe NPVpromiseeffectively
deals
with these cases and others such as McFaddenv. 481782 OntarioLtd.,271
Einhornv. Westmount
Investments
and Garbutt
BusinessCollegeLtd.v.
Ltd.,272
Hendersonand HendersonSecretarial
SchoolLtd.,27where the courts have
been forcedto retreatintoveil-piercingor the tortof inducingbreach of
contractin order to do justice. Whatshould be remembered,however,is
thatthisanalysisshowsthatanydamages or courtorderscomprehended
by the private law model here are not unjustifiedinterventionsthat
evisceratelimitedliabilitybut ratherexamples of naturalpersons,in this
case directors,being held accountable for their contractualbreach or
personal fault.
270 What is interestingis thatthe court is, in fact,complicatedlyallowingthe creditorsto

enforce the NPV promise through the appointmentof a liquadator to act in their
interests.The argumenthere is thatinstead of pursuingthiscircuitousreasoning and
legal machinations, the court should simply recognise that in the proper
circumstancescreditorscan enforcethe 'D' contract.
271 (1984), 47 O.R. (2d) 134 (H.C.J.).
272 (1969), 6 D.L.R. (3d) 71 (Sask. Q.B.).
273 [1939] 3 W.W.R. 257 (Alta. C.A.).
D. AGENCY
Clearly,as we saw in Part I, the currentthinkingon agencyas a means of

veil-piercingis grosslyinadequate for the followingthree reasons: first
there is disagreementover whetheror not agency,as currentlyapplied,
actuallyconstitutesveil-piercing;second the logical inconsistencyof asserting that the corporation is both a puppet, under the complete
control of another, while simultaneouslybeing an independent legal
actor who can enter into binding agency agreements;274
and thirdthe
majorityof cases traditionallydealt with under agency are most likely
mere instancesof statutory
interpretation.In lightof these problemsthe
issue will be examined de novofromthe perspectiveof the privatelaw
model. When this is done the question becomes: 'Can a group of contracts (consistentwith 's' and 'D') be arranged so that we can say the
corporatepatrimonybehaved as ifitwas an agent?' When thisquestion is
posed, the issues are two-fold:(1) Can the directorsbe agents for a
shareholder? (2) Can the directorspledge the patrimonyso that it is
charged as ifitwere a partner?
In response to the firstissue,the privatelaw model of the corporation
providesa clear answer.Since the contractbetweenthe directorsand the
shareholdersis one of 'non-agency'it will be verydifficulton any set of
factsto findan implied contractof agency.AsJusticeToulson argued in
Yukong,an implied contractof agency between the directorsand the
shareholdersis highlysuspect since the 'the intentionof someone who
conducts tradingactivitiesthroughthe vehicle of a one-man company
willbe quite the opposite.'275In otherwords,since an explicitcontractof
of the corporatecontract,
non-agencyis one of the centralcharacteristics
it is entirelyinconsistentwiththe idea of the corporationto findthatthe
intentionof the partieswas somethingdifferent.If the court concludes
thattherewas in facta contractof agency,then the partieswillnot have
created a 'corporation' but perhaps some other legal relationship,most
probablysome formof partnership.
While this conclusion may seem harsh, it must be remembered that
this analysis only holds for propertythat is actually transferredand
administeredby the directorsas part of the corporate patrimony.It
mightbe possible thatthe businessof the corporatepatrimonycould be
the administrationof propertyforothers.Thus, although the directors
would be 'non-agents'for the 'corporate property'in which the shareholder has an undivided share, the same directormight then agree to
and distinct
administer,as agent,some separately-owned
property(i.e., non274 See Ottolenghi,supra note 34 at 339.
275 Yukong,
corporate property)of a shareholderas part of the company's business.

Thus, ifthe shareholderagreed onlyto look at the corporate patrimony
for indemnityfor breach of the contract,it would appear as ifthe corporate patrimonywere someone's agent. The case thatcomes closest to
emulating these facts is that of Smith,Stone& Knight.In that case the
itsadminisprincipleshareholderacquired a partnershipand transferred
trationto the corporationof which itwas a shareholder.The titleto the
to the
businessremained withthe shareholderand was nevertransferred
no
taken
as
a
result
of
Furthermore, shareswere
corporate patrimony.27"
the transfer,and the directorsof the corporatepatrimonyadministered
this propertyfor the shareholder.Since the directorswere acting as the
agents of the principle shareholder in respect of that property,that
shareholderwould be liable on normalagencyprinciplesforanyjural act
performedby his agents in thatproperty'sadministration.However, it
must be remembered that the shareholder would not be liable qua
shareholderbut ratherqua principle.His, her,or itsliabilitywould be no
differentfromthat of any other person enteringinto such "an arrangement and isjustifiedon elementarycommon law principles.
This brings us to the second question: 'Could directorsenter into
limited recourse contracts of partnership or 'mutual agency' with
directorsof other corporate patrimoniesso that it appeared that these
distinctcompanies were charged withobligations as iftheywere a partnership?' While such a complex structureis possible, there would of
course be legal constraintson thistypeofanalysis.The mostimportantof
these is that the directorswould be constrainedin theirabilityto enter
into these types of agreements by their promise to administer the
patrimonyin a way that maximized its NPV.Depending on the circumstances,it mightbe difficultto provethatexposing the complete assetsof
the corporate patrimonywas value maximizing,especiallywhen passive
investmentas a limitedpartneror the incorporationof ajoint ventureis
an available option. That being said, in the appropriatecircumstance,a
'partnership'of corporate patrimoniesmightbe the proper interpretation. The fact pattern that comes closest to exemplifyingthis type of
arrangementcan be found in the aforementionedD.H.N.Foodcase.277In
thatcase, the businessof the group was dividedbetweenthreecorporate
patrimonies.The real estatewas held byPl, the truckswere owned byP2
and the rest of the business assets were held by p3. While it is farfrom
clear that the interlockingdirectorshad pledged theirrespectivepatri276 Thisis oftenseen as thekeyto theresult,see Mayson,
supranote35 at 132; Corporate
Law,supranote8 at 131.
277 Coporate
Law,supranote8 at 135-6sharesthisopinion.
monies into a contractof mutual agency,Lord Denning came close to

statingas much. He argued: 'This group is virtuallya partnershipin
which all three companies are partners.They should not be treated
separatelyso as to be defeated on a technical point.'278But if the outcome of this characterizationis examined fromthe standpoint of the
limited liabilityof shareholders,one findsthat it reallydoes not make
them liable for anythingmore than theiroriginalinvestment(s)in the
corporatepatrimony(ies).The onlymaterialfactthathas changed is that
thereis a substantialincrease in the likelihood thattheirinvestmentwill
be dissipatedin a failedbusinessventure.Yet,once again, we see thatthis
has more to do withdirectorliabilityto the shareholdersforbreaches of
the 'D' contractthanwithtraditionalveil-piercing.
In sum,whileit is clear thatin extremelyrarecircumstancesdirectors
may bothbecome agents of shareholdersfor the administrationof noncorporate property,and pledge the corporatepatrimonyinto a partnership, neitherof these affectsthe limitedliabilityof a shareholderin that
capacity.In response to the firstsituation,the shareholder is entering
into a legal relationshipthat engages his liabilitysolely because of her
status as principal. Her liabilityis no more or no less than any other
person entering into a contractof agency. In response to the second
situation,the liabilityof the shareholderforthe debts of the companyis
not in anywayincreased.
E. TORT
For manyyearsCanadian courtshave been using tortprinciplesto hold

corporate agents responsible for their actions. This process is so well
entrenched that the Ontario Court of Appeal stated unanimouslythat
the 'consistentline of authorityin Canada holds simplythat,in all events,
officers,directors and employees of corporations are responsible for
theirtortiousconduct even though thatconduct was directed in a bona
fidemanner to the best interestsof the company.'271"Yet,whetheror not
this area of law is characterized as traditional 'veil-piercing,'some
commentatorshave come to recognizethattortliabilitymaypose a threat
to the separate legal person principleepitomizedbySalomonv. Salomon.280
Thus, many courts,especiallyin the Commonwealth,have increasingly
begun to openly step back fromthe logic of thistypeof tortiousreason278 D.H.N. Food,supra note 231 at 860.
279 ADGA Systems
Ltd.v. ValcomLtd. (1999), 168 D.L.R. (4th) 351 (Ont. C.A.)
International
at 358 [emphasis added].
280 See 'Fraud,' supra note 39 at 478-9; Corporate
Personality,
supra note 161 at 105-6;
Goddard, supra note 35 at 46-47.
ing for policy reasons that 'respect' limitedliabilityand corporate law's

putativefoundation.Examples of thistypeof process can be seen in the
decisions of the New Zealand Court of Appeal in TrevorIvoryLtd. v.
the recentHouse of Lords decision in Williams
v. NaturalLife
Anderson,28'
and inJusticeLa Forest'sdissentin LondonDrugsLtd.
HealthFoodsLtd.,282
v. Kuehne& NagelInternational
Thus, thereseems to be a tensionin
Ltd.28"
the law betweenthose cases emphasizingthe principlesof tortand those
that tryto effectthe policies of corporate law, as they are currently
interpreted.
Beyond thistension,thereis also confusionengendered in thisarea by
the line of cases dealing with the primaryliabilityof a corporation
through the rather mystical'directing mind and will' process. This
'identification'group of cases, which have for many years run on a
parallel path to the others,has nonetheless occasionally confused the
issues involvedbyspeakingof the directorsas the 'organs' or 'ego' of the
The argumentof this section willbe thatwhen these three
company.284
groups of cases are examined froma privatelaw perspective,one can see
that there is in factno conflictbetween them.In the cases where directorsand shareholdershave been held liable thereare justifiablereasons
forthis;namely,thatthe participantshave committeda faultthatrenders
them liable to make reparation.Likewise,the privatelaw model can also
coherentlyexplain whyliabilityhas in some cases been limited to, or
imposed solely upon, the corporate patrimony.In order to explain
coherentlythese threelines of cases, it is firstnecessaryto clear up some
common misconceptionsabout the application of tortprinciplesin the
corporate contextproduced by the misuse of the 'organ' theoryof the
company.
This theory,stillpopular among manyjudges and academics, posits
that once liabilityis attributedto the separate legal person throughthe
actions of its'vitalorgans,' the constituentdirectorsare somehow 'washed' clean of legal responsibility.285
As ProfessorsBonham and Soberman
explain:
fromdayto
[T]he mostimportant
body,theone thatgovernsthecorporation
is likenedto
dayand makesthemajorbusinessdecisions,theboardofdirectors,
the head, the controlling
organ.The actionsof the board thenbecome not
281
282
283
284
285
[1992] 2 N.Z.L.R. 517 (C.A.) [hereinafterTrevor

Ivory].
[1998] 1 W.L.R. 830 (H.L.) [hereinafterWilliams].
Supra note 138.
See Canadian, supra note 84 at 117.
See R. Grantham,'Commentaryon Goddard' in Corporate
in the20thCentury,
Personality
eds. R. Grantham& C. Rickett,(Oxford,Hart Publishing,1998) 65 at 68-9.
merelyactionsof the agentbut actionsof the companyitself.This subsidiary

wasacceptedbyEnglishcourtsearlyin thepresent
branchoftherealisttheory,
has
not
been
and
doubtedsincethen.In factthe theoryhas
seriously
century,
whomthecourtconsidersthe
been refinedto theextentthatactsofkeyofficers
truecontrollers
of the company,have been acceptedas acts of the company
itself.28"
The implicit reasoning is that if the corporation is primarilyliable
through the rules of attributionthen the directorscannot also be primarilyliable. While thisreasoningmaybe generallyplausible ifthe 'legal
person' metaphor is stretched to its limits,once the corporation is
understood as being an emptyshell, a patrimonyto which we factually
charge monetaryliabilitiesand assets,one can properlyunderstand the
relationshipof thisgroup of cases to the privatelaw liabilityof corporate
agents.
When the matteris re-examined,one findsthatthisconclusion as to
directors 'being' the company,was based on a reading of cases where
judges had to interpretstatutorylanguage, most oftenin the contextof
Withthisrealized,these cases
imposingcriminalor regulatoryliability.287
interact with the common law in the followingmanner. Clearly, for
reasons of public policy,the legislatormaywantto charge the corporate
patrimony directlywith liabilityfor the acts done by its corporate
agents/employeesas ifthe corporatepatrimonyhad committedthe acts
itself.Moreover,forpolicyreasons the legislatormayalso wishto waiveits
rightto pursue the naturalpersons involvedin the corporateenterprise
forthe samestatutory
offence.When thisis intendedbythe legislator,the
courts, throughstatutoryinterpretation,will of course have to choose
whose actions will 'count' to satisfythe legislator'sintentionto charge
the corporatepatrimony,as wellas who should be forgiven.This is bound
to be a major task of the courts given that corporate law is becoming
increasinglymore regulated and complex, and that the Interpretation
referenceto the word "person,'
Act88informsus both thatanystatutory
or any word or expression descriptiveof a person, includes a corporaand thatany statutorylanguage dealing witha corporationis to
tion';2893
286 D. Bonham & D. Soberman, 'The Nature of Corporate Personality'in Studiesin
Canadian Company
Law, vol. 1,J.S. Zeigel, ed. (Toronto: Butterworths,
1967) 3 at 12.
287 See for example, The 'Rhone'v.The 'PeterA.B.Widener,'
[1993] 1 S.C.R. 497; Canadian
Co. Ltd. v.
Diedge & Dock Co. Ltd.v. TheQueen,[ 1985] 1 S.C.R. 662; Lennard'sCarrying
AsiaticPetroleum
Co. Ltd., [1915] A.C. 705 (H.L.); Meridian,supra note 134.
288 R.S.C. 1970, c. 1-23,s. 1.
289 Ibid. at 35(1).
be interpreted'as exemptingfrompersonal liabilityforitsdebts,obligations or acts individualmembersof the corporation.'290

But no matterhow common thisprocess of corporateattributionand
forgivenessbecomes it mustbe rememberedthatthisis a purelystatutory
exercise.As was pointed out bythe PrivyCouncil in MeridianGlobalFunds
'This is alwaysa matterof
Commission:
ManagementAsia Ltd. v. Securities
interpretation:given that it [the provision]was intended to apply to a
company,howwas itintended to apply?Whose act (or knowledgeor state
of mind) was for thispurposeintended to count as the act etc. of the
company?'291 When this attributionprocess is correctlyviewed as a
statutoryexercise,there is no need to personifythe company generally
throughoutthe privatelaw, throughthe device of the 'directingmind
and will.' Furthermore,as Lord Hoffmann warned, to analogize a
company fullywith a natural person, as has been done by the 'organ'
school, is dangerous because 'thisanthropomorphism,
bythe verypower
of the image, distractsattentionfromthe verypurposes forwhich ... the
notion of directingmind and will [is used], namelyto apply the attribution rule derived' fromthe specificstatutoryrule in question.2'2Thus,
outside of thisfieldof statutory
such anthropomorphism
interpretation,
is useless and misleadingfurtherconfusingissuesbyimplyingmoral and
physicalpresence to the inanimatecorporatepatrimony.
When a view similarto Lord Hoffmannor the privatelaw model is
taken,it can be seen that the factof statutory'attribution'and 'forgiveness' is in no way a general principle that somehow gives directors,
shareholders,or employees carteblancheprivatelaw immunityfor their
actions whileparticipatingin the corporatecontract.For example, while
a statutemay impose criminal liabilityon A. Salomon& Co. Ltd. if Mr.
Salomon, its directingmind and will,had intended to kill his clerk by
running him down with the company car, it does immunize Mr. Salomon, as director,from a claim by the same clerk that he negligently
drove over him while on company business. As one author has stated:
'Mr. Salomon could not say 'I was not me at the time, I was incorporated.' So victimsof tortsbyreal people can stillsue those real people they can disregard the presence of a company [patrimony]if theyso
wish.'21" Similarly,the shareholdersof a company will be in the same
position as the directors;if theyhave committeda torttheywill also be
290 Ibid.at 21(1) (d).
291 Supra note 134 at 419.

292 Ibid. at 421.
293 Goddard, supra note 35 at 35. For a similarviewsee, Thompson, supra note 52 at 8 &
'Endless,' supra note 184 at 663.
CANADIAN
CORPORATE
LAW 231
held liable. Thus, as David Goddard argues in his tributeto Salomonv.
Salomon:
in
In general,we can say thata person'scivilliabilityforactingwrongfully
in
of
the
law
breach
will
by
non-voluntary
obligations
imposed
general
person,
notbe reducedbythepresenceofa corporateentity....Ifthatindividualis the
or iftheowneris a partyto thetort(i.e. had directedor
ownerofthecompany,
- theowneris fully
limited
is irrelevant
liable.294
it),
liability
procured
With the attributionmisconception disposed of we can move on to
examine the more difficultand controversialfact patterns that touch
directlyon the issue of privatelaw liability.In these typesof situations,
the Commonwealthcase law, as we have seen, seeminglydivides into a
v. Moirand B.G. Preeco,
'tortapproach' epitomizedbysuch cases as Wolfe
where tortiousliabilityis more readily imposed and a 'corporate approach' epitomized by the decisions in both TrevorIvoryand Williams.
The task here is to see if these seeminglydisparate decisions, which all
have some intuitiveappeal on theirfacts,can be reconciled throughthe
application of the privatelaw model to show whyliabilityis justifiably
imposed in one set of circumstancesand not imposed in another. The
argumentof thissection is thatprivaterules can explain thisdivisionof
approaches. In order to accomplish thistask,thispaper willexamine the
'corporate approach' cases first.
Upon examination the facts,issues, and reasoning of both the New
Zealand and the Englishcourtsin the Williams
and Trevor
Ivorycases were
essentiallysimilar.In both cases, the centralissue was whetheror not the
directorsof a companycould be held personallyliable forthe financial
losses caused bythe negligentadvice of 'the company' in whichtheywere
directors. In Williams,the loss was caused by a defective franchisee
prospectus thatpromised higher returnsthan were actuallyenjoyed by
the appellants. In TrevorIvory,the loss was caused by mistakenadvice
about pesticide thatled to the destructionof an entirecrop of raspberry
bushes. In both cases,the companies wereessentiallyone-manoperations
withthe directorscomprisingthe managementand principalshareholders. The onlymajor differencebetween the twocases was that,in Trevor
Ivory,the directorprovidedthe advice personallyand had had extensive
dealings withthe complainants,whereas in Williamsthe plaintiffsdealt
directlywith an employee of the company and only sued the director
afterthe companywaswound up. Both the New Zealand Court ofAppeal
and House of Lords ruled thatsince therewas no 'assumptionof respon294 Goddard, supra note 35 at 36.
sibility'by the directorsforthe advice of theircompanies, the directors

could not be personallyliable. Both aggrievedpartieshad to look solely
to the corporation for the satisfactionof their claims. Although both
courts' language is couched in the misguided'legal person' doctrine,the
argumenthere will be thaton the privatelaw model theyboth come to
the correctconclusion.
One can hear the objections of the unconvertedalready: 'Hold on,
above you argued that there is no such thing as a legal person? The
whole argumenthas been that there is only a corporate patrimonyand
thereforethat natural persons are responsiblefor theirdelictual fault.
How is thissituationdifferentfromanyothertortcase? Since thereis no
'legal person' to relyon, the aggrievedpartiesin both these cases must
have been relyingon the advice of someone. Who else could it be besides
the director,who mustbe liable? How can you argue thatthese cases are
correctlydecided? Eitheryou followthe privatelawmodel and argue that
these cases are wronglydecided, or you abandon the privatelaw model!'
While these assertionsare not withoutmerit,theycan be responded to in
twoways.
In response to the factualcircumstancesof Williams,
it can be argued
thatthiscase is correctlydecided on ordinarymisrepresentation
and tort
principles.From the factsit is not clear thatthe appellants actuallyrelied
on the directorin any real way.As was statedbyLord Steyn:
In the presentcase therewereno personaldealingsbetweenMr.Mistlin[the
Therewas no exchangesor conductcrossingthe
director]and the plaintiffs.
which
could
have
thatMr.Mistlinwaswillingto
line,
conveyedto theplaintiffs
assumepersonalresponsibility
to them.... I am also satisfied
thatthereis not
even evidencethat the plaintiffs
believedthatMr. Mistlinwas undertaking
to them.Certainly,
thereis nothingin thecircumstances
personalresponsibility
to show thatthe plaintiffs
could reasonablyhave looked to Mr. Mistlinfor
indemnification
ofanyloss.295
In other words, in suing the director, the plaintiffssued the wrong
person! Clearlythe courtswill not hold people liable for the tortsthey
did not actuallycommit.In thiscase, since the plaintiffs
did not relyon
the directorand cannot legallyrelyon an inanimateobject,2!6theymust
295 Williams,
296 But see contraLa ForestJ's decisions in LondonDrugs,supra note 138 and Edgeworth
Construction
Ltd. v. D. N. Lea & AssociatesLtd., [1993] 3 S.C.R. 206 [hereinafter
where he argues primarilyon policythatit is possible fora naturalperson
Edgeworth],
to be said to have relied on a group of funds: 'While theymay,in one sense, have
expected thatpersons in the position of the appellant would relyon theirwork,they
would expect thatthe appellant would place reliance on theirfirm'spocketbook and
have relied on the employee withwhom theyhad had almost exclusive

contact. In thissense, the outcome of the House of Lords decision is an
example of the private law model's thesis that liabilitywill only be
imposed on directors or shareholders for the same reasons that it is
imposed on others.In thiscase the answer is quite simple: no reliance,
no liability.
The response of the naysayerto this mightinvolvesomething along
these lines: 'You have merelypicked an easy case! Anybodycan see why
the directoris not liable in Williams,
but how can you explain the nonof
the
he
was
sued) or of the "hands-on"directorin
liability
employee (if
TrevorIvory?On tortprinciples,which the privatelaw model positsapply
generally,these typesof directorsand employees must be liable if they
were relied upon!' While thisis the proper solution when the analysisis
based solelyupon pure tortanalysis,it mustbe rememberedthatthereis
more going on here than merelytort.In these typesof situationsthere
was also a contractthatallocated riskbetween the parties.Thus, the solution to these problemslies in a proper interpretationof the contractenteredintobythe directorson behalfof the corporatepatrimony.In other
words,whatmutualpromisesdid the participantsin Trevor
Ivorymake?
In the TrevorIvoryand Williamscases, the fact that the courts are
focussingon an 'assumption of responsibility'is theirwayof sayingthat
the directordid not assumefinancialresponsibility
fora negligentbreach
of his legalduty.The only way that such a state of affairscan occur,
In Trevor
however,is throughcontract.297
Ivorythe court mustbe saying
thatwhile Mr. Ivorywould otherwisehave been responsible,the plaintiff
farmers contracted
to look solely to the corporate patrimonyfor any
indemnificationoccasioned bya breach of the dutyof care. In thissense,
the parties have entered into a contractwitha limited or non-recourse
termno differentthan one thatstated 'my liabilityis limitedto $10,000
for negligence, absent dishonestyor fraud.'298When there are concurrent contractualand delictual obligations,the analysisis simple - tort
not theirsforindemnification.'The problem is thatI do not thinkit is possible in law
to detrimentally
relyon anythingbut the professionaladvice or services of a natural
person. The factthatone mayreasonablyrelystemsfromthe statusof the speaker not
the sizeof theirbank account. As was reiteratedbyIacobucciJ., for the majorityin the
same case LondonDrugs,supra note 138 at 336, when reliance is used in tortcases 'it is
concerned withthe relationshipbetween the plaintiffsposition and the tortfeasor's
conduct, notwiththe relationshipbetween the plaintiff'sposition and the tortfeasor's
pocket-book.' Thus, the betterinterpretationof these typesof situationsis the one
offeredhere - thatthe partieshave agreed to look onlyat the corporatepatrimonyfor
the financiallosses occasioned bybreach.
297 See Iacobucci J. in LondonDrugs,supra note 138 at 336.
liabilitycannot be used to circumventarrangementsagreed to through

As was stated by the Supreme Court of Canada, 'tortliability
contract.2"9
in a case such as this falls to be assessed in a contractualmatrix.The
parties planned obligations must be given pre-eminence.Where those
planned obligationsnegate tortliability,contract"trumps"tort.'00 David
Goddard has made thissame point in relationto the Trevor
Ivorycase:
The Andersons[theplaintiffs]
werevoluntary
of thecompany.They
creditors
knewwho theyweredealingwith... The Andersonsweresimplytrying
to use
aside
limited
recourse
tortto improvetheircontractual
to
set
the
term
bargain,
whichappliedbyvirtueofcontracting
withthecompany.Butthereis absolutely
no ground,froma legalor economicperspective,
forpermitting
thecontractto
be rewritten
in thisway.The limitedrecoursetermis just like an exclusion
clause: and the courts have repeatedly held that claims based on concurrent
shouldnotbe and cannotbe used to getaroundsuchclauses.3"1
liability
The only reason that thisanalysisis confused in the cases is thatof the
identification
interpositionof 'legal person' and director-corporation
reach solutionsin thesesituationsthatare
doctrines,302whichfortunately
similarto the conclusions of the privatelaw model.
The only controversialquestion that arises out of this analysis is
whether such a non-recourseterm is to be necessarilyimplied into all
service contracts entered into by corporate agents on behalf of the
corporate patrimony?While this issue is debatable, the answer to the
question is most likely'yes.'808As Lord Cooke argued in Trevor
Ivory:
I commitmyself
to the opinionthat,whenhe formedhis company,Mr. Ivory
made it plain to the worldthatlimitedliabilitywas intended.Possiblythe
intotheconsultancy
but
contract;
plaintiffs
gavelittlethoughttothatin entering
sucha limitation
is a commonfactofbusinessand ... theconsequencesshould
in myviewbe acceptedin theabsenceofspecialcircumstances.:314
299 See CentralTrustCo. v. Rafuse,[1986] 2 S.C.R. 147; Henderson

v. Merrett
Ltd.
Syndicates
[1995] 2 AC 145 (H.L.).
300 Bow ValleyHusky(Bermuda)Ltd. v. SaintJohnShipbuilding
Ltd. (1997) 153 D.L.R. (4th)
385 (S.C.C.) at 399 perMcLachlinJ.
302 See Cooke, supra note 43 at 520; Trevor
Ivory,
supra note 281 at 526 perHardyBoysJ.,
where theyclaim the general applicationof company-director
identificationoriginally
designed forstatutoryuse.
303 See also Corporate
Personality,
supra note 161 at 106 ('incorporationis to be taken as a
strongindication thatlimitedliabilitywas intendedand thatthe incorporatorsdid not
intend to be liable forthe debts of the company'); Goddard, supra note 35.
304 Supra note 281 at 524.
Likewisein his decision in LondonDrugs,JusticeLa Forestargued:

In myview,wherethe plaintiff
has suffered
injuryto his property
pursuantto
contractual
relations
withthecompany,
he can be consideredto havechosento
deal witha company
[patrimony].
Companylegislation
providesfor'notice
typically
and publicityof the factthata companyis under a limitedliabilityregime;
customers
and creditors
arethereby
circumstances
puton noticethatin ordinary
can
look
to
the
for
the
satisfaction
of
their
claims.31s
they only
company
As was stated before,when a corporate agent signs on behalf of 'x
Ltd.' she has financiallybound the corporate patrimonyin return
fora
promisebythe creditorthathe willexecute onlyagainstthatfundshould
the relevantpromisebe breached. Anyotherinterpretation
would seeminglydefeatthe purpose of the whole transaction.Thus, when the factof
limitedliabilityis publicized and knownto each party,the non-recourse
term is implied as an 'instinctwith obligation' to give effectto the
parties' intentions."":The only 'exception,' of course, would be where
the parties' words and deeds clearlydemonstratedthat a differentoutcome was intended, such as where theyintended the concurrentor sole
financialliabilityof the director.It is contended thatthistypeof contracttortreasoning easilyexplains the outcome in the Williams,TrevorIvory,
and LondonDrugs,as well as such problematicmisrepresentationcases as
Sealand ofthePacificv. RobertC. McHaffeLtd.307and Edgeworth
Construction
Ltd.v. D. N. Lea & Associates
Ltd.308
Afterhavingreached thisconclusion
the only difficulty
that remains is to show how the privatelaw model's
solution interactswithseeminglycontradictory
'tortapproach' cases.
The firstof thesedifficult
cases is theAlbertaCourtofAppeal decision
in Wolfev. Moir.3o'In that case, the plaintiffwas injured while roller
skatingat a rinkowned byChinook Sport Shop Ltd. The primaryshareholder of the companywas Mr. Moir,a formerrecreationdirectorof the
local town.When advertisementswere made on the radio the rinkwas
referredto as Moir's SportsLand; when theywere made in the paper the
rinkwas known as Moir's Sports Land (Fort Whoop-up). On the ticket
the FortWhoop-up name was used. Mr. Moir
purchased by the plaintiff,
was aware thatpeople identifiedhimwiththe rinkin theirminds and he
cultivatedthis impression.Furthermore,none of the documents con305 Supra note 138 at 289.
306 See Sinclairv. Purdy,235 N.Y. 245 (C.A. 1923) at 254 (perCardozo J.) ('Though a
promise in wordswas lacking,the whole transaction,it mightbe found,was "instinct
withan obligation"imperfectly
expressed.').
307 (1974), 51 D.L.R. (3d) 702 (B.C.C.A.).
308 Edgeworth,
supra note 296.
309 Supra note 132.
tained the letters'Ltd.' in the name. JusticeSinclair rendered decision

forthe plaintiffsagainstMr. Moir on the basis thatcorporateformalities
had failed to be compiled with.
Can the privatelaw model explain thisdecision againstthe directorin
lightof the implied non-recourseterm?The answerto thiscase is that,
viewed objectively,
the non-recoursetermwas not intended by bothof the
What
was
intended was a contractbetween the plaintiffand Mr.
parties.
Moir (operating as the proprietorof Sports Land) which in no way
limitedhis personal liability.The factsthatno effortwas made to publicize the 'Ltd.' natureof the corporationespeciallyon the ticket,and that
Mr. Moir cultivatedthe impressionthathe was operatingFortWhoop-Up
as his personal business, leads to the conclusion that he had made a
representationof unlimited
liability.As the learnedjudge argued: where
'a person chooses to advertiseand to hold himselfout to the public
withoutidentifying
the name of the company... he runsthe riskof being
held personallyresponsible.'310 Since Mr. Moir did not make anyeffortto
publicize the limited nature of his business, there is no way that nonrecourse interpretationcan be implied to the situation. In this case,
much like Chaingv. Heppner," VulcanIron Worksv. Leary,"' Corkumv.
MotorsLtd.v. Yee,314
Ltd.v. Brown,"'"
and Trial
Gelhorn
RoyalStores
Lohnes,"13
"" liabilitywas justifiablyimposed on the one
TireServiceLtd. v. Scobie,
partyforthese unlimitedliabilityrepresentations.
Anotherdifficult
case, whichmightseem to cast doubt upon the nonis the decision of the BritishColumbia Court of
recourse interpretation,
in
In
B.G.
Appeal
Preeco.317 thatcase, the plaintiffsentered into negotiationsto sell real estateto Bon StreetDevelopments (BSD1). Unbeknownst
to the plaintiffsthe directors,K and M,fraudulently
caused the corporation twiceto change itsname and become Bon StreetHoldings. K and M
then immediatelyincorporateda newcompanycalled Bon StreetDevelopments (BSD2) to enterinto the contract.The new company,BSD2, then
entered into the land contract with the plaintiff.BSD2 subsequently
defaultedand, at trial,the plaintiffreceivedjudgements against boththe
corporation,BSD2, forbreach of contractand K and Mfordamages in the
tortof deceit. The Court ofAppeal upheld the lowercourt's decision.
310
311
312
313
314
315
316
317
Wolfev.Moir,supra note 132 at 71.

(1978), 85 D.L.R. (3d) 487 at 493-494 (B.C. Co. Ct.).
(1905), 1 W.L.R. 453 (Man. KB.).
(1981), 121 D.L.R. (3d) 761 (N.S.S.C.A.D.).
(1969), 71 W.W.R. 526 (Man. Q.B.).
(1956), 5 D.L.R. (2d) 146 (Nfld.S.C.).
[1976] 5 W.W.R. 409 (Alta. Dist. Ct.).
Supra note 132.
CANADIAN
CORPORATE
LAW237
In lightof thisdecision it can be asked how thiscase squares withthe
non-recourse interpretationof the Williamsand TrevorIvorycases reviewed above? There are two ways to answer this question. The first
answer is to simplysay that the non-recourseclause is not intended to
apply to fraudulent,as opposed to negligent or innocent, breaches of
duties.3'"The second interpretationis to saythatthe plaintiffsare being
held to theiroriginalnon-recourseagreementbut thatthisagreementis
being given effectby the damages for the tortof deceit. Phrased differently,the plaintiffsthoughttheyhad a non-recoursecontractby which
theywere to look to 'patrimonyBSD1' for indemnificationfor breach.
Due to the fraud of K and M theyinstead received a non-recoursecontract with patrimonyBSD2.31' The differencein the value of the two
promises,say 100 dollars,is thereforemade up by the fraudulentdirectors as the damages for the tort of deceit. Therefore, through the
application of tortprinciplesboth the plaintiffsand the defendantsare
held to theiroriginalbargain.320But whateverinterpretationof thiscase
is taken the privatelaw model can show that the general non-recourse
the decision of
is respected,whilesimultaneouslyjustifying
interpretation
the court.
F. VEIL-PIERCING IS NOT EXCEPTIONAL
In sum, the analysisin Part III has come to the followingconclusion namely,thatthe application of the privatelaw model to the veil-piercing
cases revealsthatnothingstrange,exceptional,or unjustifiedis occurring
in this area of law beyond the proper application of well-settledlegal
principles to the jural relations of those involved in the corporation.
Where naturalpersonsare liable under the general privatelaw rules,the
courts are simplyimposing this liability.32'Similarly,where the parties
involved have contracted in order to shiftthat liabilitythrough nonrecourseagreements,thecourtsare enforcingthese contractualterms,as
is the general practice.Likewise,where a statuteclearlyimposes liability
irrespectiveof the corporate contracts,the courts are enforcingthese
318 For such a view,see LondonDrugs,supra note 138 at 317 perLa ForestJ.
319 This is similarto the court's opinion of the nature of the fraud,see B.G. Preeco,supra
note 132 at 33-4.
320 The onlyproblemwiththisanalysisis thatfromreading the case one is not sure ifthe
damages for deceit, some - 400 000 dollars - actually corresponded to what the
would have received had the non-recoursecontractbeen withBSD1 rather
plaintiffs
than withthe shell-corporation.
321 This conclusion is mimickedby R.B. Thompson, 'Piercing The Corporate Veil: An
Empirical Study' (1991) 76 Cornell L. Rev. 1036 at 1047 (surveyof 1 600 American
veil-piercingcases revealsno case where liabilitywas imposed on a passiveshareholder
who had not participatedin the wrongalleged).
statutesas is theirduty.Finally,where a statuteor contractrequires interpretationor proper enforcement,the courtsare not lettingincoherent doctrinestand in the wayof the legallyjustifiedresult.
What is extremelyinterestingabout this analysis,at least from the
perspectiveof the pragmaticlawyer,is thatthe privatelaw model proves
to be highlypredictive.
Unlike the currentintuitiveand ad hocunderstanding of the cases under which no one seems able to rationalizewhen a
judge will (or willnot) hold shareholdersor directorsliable throughthe
veil-piercingterminologyor what quantum of damages he/she will
impose, the private law model gives clear guidance on the courts'
approach to these questions.As has been borne out byour examination
of the cases, the courts will resort to the language of 'piercing the
corporate veil' when any general legal obligationhas been violated bya
natural person in the corporate context and incoherent 'corporate
personality'is thoughtto stand in the way."22In otherwords,ifx would
havebeen found liable under a general tort,contract,unjustenrichment,
or statutoryanalysis,the court willfindthemliable throughsome sortof
'veil-piercing.'Furthermore,these 'veil-piercing'damages or remedies,
while often inadequately expressed, will almostalwaysbe equivalent to
that which is objectivelynecessary to undo the harm caused by the
violation of right.Paradoxicallythen the privatelaw model provesto be
more pragmaticthan the current'pragmatistapproach' because itallows
the practising lawyer to predict judicial outcomes with reasonable
certainty,and thus properlyadvise clients on when to settle and/or
prosecute an action involvingclaims of veil-piercingand corporatetort.
Conclusion
In conclusion, thispaper has attemptedto demonstratethatthe principle enunciated in Salomonv. Salomonand adopted into our organizing
statutesis not a doctrineworthyof providingthe conceptual foundation
of Canadian corporate law. In Part I it was argued that reliance on the
'central' principle of the 'separate legal person' renders our current
body of corporate law incoherentin twosenses. First,it is incoherentin
that the principle is directlycontradictedby the veil-piercingcases that
statethe circumstancesin whichthe separatepersonalitymaybe ignored.
322 For a similarview,see Re Clark'sWill 204 Minn. 574 (S.C. 1939) at 578 ('Many cases
present avowed disregard of the corporate entity....But theyall come to just thiscourts simply will not let interposition of corporate entityor action prevent a
judgement otherwiserequired. Corporate presence and action no more thanthose of
an individualwill bar a remedydemanded bylaw in application to facts.').
Direct contradiction is the worst kind of incoherence. Beyond that

Canadian corporate law is incoherent in a second sense because this
organizingdoctrinefailsto adequatelyexplain all of the law overwhichit
claims dominion. In Part II a replacement foundational principle was
suggested, namely a privatelaw model of the corporation based on a
nexus of jural relations between shareholders, directors,and outside
creditors.It was argued thatsuch a theoryadequately explains all of the
traditionalattributesof the corporationand manyproblematicareas in a
coherentfashion.Afterdealing withobjectionsto the privatelaw model,
the explanatorypower of the theorywas then put to the testin Part III
and used to explain the unrulyveil-piercingand corporate tortcases as
the correct application of traditionalprivatelaw doctrines within the
corporate context disguised in confusing language. Hopefully, this
process has demonstratedthatonce the corporationis properlyconceptualized,it is unnecessaryto 'escape fromthe law' in order to satisfactorilyanalyze complicatedfactualsituations.
Finally,for those pragmaticlawyerswho remain unconvinced by the
forgoinganalysisor who may dismissthe privatelaw model as an academic 'flightof fancy,'all I can sayis, 'Test ityourself!'Choose any other
complicated fact pattern - such as one that invokes the oppression
relations- and compare the clear
remedyor involvesparent-subsidiary
and intelligibleanswersthatwill be givenby the privatelaw model with
the divergent'solutions' provided by the 'practical' black letterlaw. If
you agree that rationalityis a goal of the common law and our legal
tradition,then ask yourselfwhich explanation of the 'Corporation' and
our corporate law best demonstrates the rationality,simplicity,and
coherence of thesejudicial outcomes: the traditionalformulationbased
on 'separate entity'or thatgivenbythe privatelaw model? Furthermore,
ask yourselfwhich theorymore accurately allows you to predict the
factualresolutionsof futurecases (i.e., x wins,withY solution,justifiedin
z black letter terms)? Since the purpose of any rational inquiryis to
coherent
providethe simplest
explanationofanyphenomenon, everylawyer
mustanswertheseverymaterialquestionsbeforeultimatelyassessingthe
worthof any theoryof the corporation.In the course of renderingyour
judgement, do not let historyor familiaritycloud your thinking.A
distinguishedpedigree was not a reason to continue to claim thatthe sun
revolvesaround the earth,to maintainthe traditionalcauses of action in
tort and contract,nor in the opinion of the DickersonCommittee,
23 to
323 R.W.V. Dickerson et al., Proposals
Lawfir Canada, 2 vols.
fora NewBusinessCorporations
(Ottawa: InformationCanada, 1971).
perseverewholeheartedlywiththe idiosyncraticand needlesslycomplex

English corporate model. Thus, in yourdeliberationsa long historyand
an ingrainedpractiseshould pose no barrierto rejectingthe incoherent
'separate entitydoctrine' and replacingitwiththe privatelaw model.

Canadian Corporate Law, Veil Piercing

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Canadian Corporate Law, Veil-Piercing, and the Private Law Model Corporation

Author(s): Jason W. Neyers

CANADIAN CORPORATE LAW,

174 UNIVERSITYOF TORONTO LAWJOURNAL

You reThinking like a lawyerinvolvedbeing suspicious and distrustful.

fictionaccording to common usage" or to argue thatspeaking of groups

In order to go about demonstratingthat Canadian corporate law is

happen to be juxtaposed.'"" The forthcomingargument will be that

178 UNIVERSITYOF TORONTO LAWJOURNAL

plane higher than brute force.Finally,because the quest forcoherence

PrivateLaw, supra note 11 at 13.

CANADIAN CORPORATE LAW 179

as the pragmatic lawyerwill have realized, this state of affairslargely

Open any major corporatelaw textbookand one will be inundated with

180 UNIVERSITYOF TORONTO LAWJOURNAL

common law doctrine relatingto the corporation.For evidence of this,

CANADIAN CORPORATE LAW 181

182 UNIVERSITY OF TORONTO LAWJOURNAL

then explain thatthisis thecentralprincipleof Canadian corporate law.

UNIVERSITY OF TORONTO LAWJOURNAL

identitycan stillbe formedwithunlimitedliabilityforitsshareholders."

U.K.C.A., s. 1(2) (c), supra note 13.

of the law and inanimateobjects do not."' Thus, tryingto figureout what

186 UNIVERSITY OF TORONTO LAWJOURNAL

in 'life' and do not need protecting.The ultimateirony,then,is thatin

arguments show the limited usefulness of the present 'legal person'

188 UNIVERSITY OF TORONTO LAWJOURNAL

able and once again smacks of 'whimsical'84justice rather than the

In this section I will outline and supplementa privatelaw model of the

190 UNIVERSITYOF TORONTO LAWJOURNAL

the directorsto manage the corporatepatrimonywithcare and loyaltyso

One word of caution is required, however,before the examination

CANADIAN CORPORATE LAW 191

Of the fiveattributesof the modern corporationthe privatelaw model

192 UNIVERSITY OF TORONTO LAWJOURNAL

112 'Regulation,' supra note 8 at 422.

CANADIAN CORPORATE LAW 193

their claims. Instead of the traditionalformulationof director'sduties,

UNIVERSITY OF TORONTO LAWJOURNAL

For many, this 'director/non-recoursecontract' analysis may seem

196 UNIVERSITYOF TORONTO LAWJOURNAL

legal reason for its regime of vicarious liability.Instead, the major

198 UNIVERSITYOF TORONTO LAWJOURNAL

the plaintiffby transferringthis valuable promise.1'" Since, in most

139 'Regulation,' supra note 8 at 422.

In other words,since neitherthe directorsnor shareholderscommitted

200 UNIVERSITYOF TORONTO LAWJOURNAL

manage the corporatepatrimony,and are not subject to directionsfrom

The 'D' and 's' contractscreate a separate corporate patrimonyand

creditors, the use of corporate agents, and the subrogation of tort

Much like the other traditionalcharacteristicsof the corporation,free

Perpetual existencealso flowsfromthe nexus of contractsthatcreate the

202 UNIVERSITY OF TORONTO LAWJOURNAL

CANADIAN CORPORATE LAW 203

The second reason for the NPVpromise is that it eliminatesmanyof

204 UNIVERSITYOF TORONTO LAWJOURNAL

CANADIAN CORPORATE LAW 205

but also in the ever-increasing

206 UNIVERSITY OF TORONTO LAWJOURNAL

person cannot operate to cure a breach of duty to another.''" Thus,

The second option is to grant the

177 'Regulation,' supra note 8 at 458.

208 UNIVERSITYOF TORONTO LAWJOURNAL