Liability in Construction Contracts - Part 2
In our blog post Liability in Construction Contracts: Parks v. McAvoy we explored the parameters of director/shareholder liability for defective construction. In that post, we highlighted the legal test for finding directors and corporations concurrently liable.
In a new decision, Swanby v Tru-Square Homes Ltd, 2023 ABCA 224, the Court of Appeal overturned a decision which found the major shareholder of a construction company concurrently liable in tort (negligence) with the company.
Mr. Metcalfe owned 99% of the shares in Tru-Square Homes Ltd. The Swanbys contacted Mr. Metcalfe to see if Tru-Square would act as the general contractor for a residential build. Mr. Metcalfe quoted just over $1MM for the job and the Swanbys signed a contract with Tru-Square.
The project began and during the first two years of work, Mr. Metcalfe was mostly absent from the site. Into the second year of the project, a problem arose with leaking windows and leaking soffiting. As the general contractor, and not the trade, Tru-Square took the position that it was not responsible for remedying the windows and soffits. This led to a breakdown in the business relationship and the Swanbys had to engage a new contractor to finish the job.
The Swanbys filed a claim against Tru-Square for breach of contract, and alleged that both Tru-Square and Mr. Metcalfe were liable in negligence. The Swanbys had to engage a new contractor to finish the job.
At King’s Bench, the justice ruled in favor of the Swanbys finding that Tru-Square in breach of contract and that Mr. Metcalfe and Tru-Square were jointly and severally liable in negligence. The justice noted that Mr. Metcalfe treated Tru-Square and himself interchangeably and mingled the business’ affairs with his personal affairs. While the justice was not prepared to find that Mr. Metcalfe’s failure to disclose the construction deficiencies as full-blown fraud, it was “very close to the line”.
Mr. Metcalfe appealed the decision.
In reviewing the lower court’s decision, the Court of Appeal took special care to note that this was not truly a case of piercing the corporate veil but rather a case of alleged concurrent personal liability in tort. The King’s Bench justice erred by failing to distinguish between the two doctrines.
Quoting an earlier decision the Court of Appeal reiterated Force Inc v I Spy-Eagle Eyes Safety Inc, 2022 ABCA 25 "When an individual is found to be concurrently liable for a tort committed in the name of a corporation… the liability of the individual is based on his or her breach of an individual duty owed in tort, not by lifting the corporate veil to impose the corporation’s duty or liability on the individual."
After clarifying the law, the Court of Appeal considered whether personal liability should be imposed on Mr. Metcalfe. In the lower court decision, the judge found that Mr. Metcalfe was negligent in his oversight of the projects, billed for work not completed, and was negligent in dealings with the Swanbys. Because the King’s Bench justice was applying the wrong test, there was no finding that Mr. Metcalfe owed a personal duty of care to the Swanbys. The lower court found that throughout, he acted in the interests of the company, and not for any individual and distinct personal interest. Such a finding is incompatible with a ruling that Mr. Metcalfe was personally liable.
In hearing the appeal, the Court found that all of Mr. Metcalfe’s negligent acts were committed as a part of Mr. Metcalfe acting on behalf of the corporation and noted that “personal liability cannot be imposed on human agents of the corporation just based on the circumstances of the case”. The Court of Appeal concluded that the Swanbys legal claim was against Tru-Square
therefore the Swanbys only After a full examination of the Hogarth and Hall criteria, the Court of Appeal held there was no independent tort liability on the part of Metcalfe, and that the only available remedy to the Swanbys was against Tru-Square.