Getting Around the Corporate Veil through Agency
In the recent decision of 1196303 Ontario Inc v Glen Grove Suites Inc, 2015 ONCA 580, the Ontario Court of Appeal considered to what extent parties not privy to an agreement should be held liable for the obligations it creates.
In that case, 1196303 Ontario Inc. (“119”) entered into a settlement agreement with 1297475 Ontario Inc. (“129”), a shell corporation which was owned by Mrs. Sylvia Hyde. Mrs. Hyde was also the sole owner of Glen Grove Suites Inc. (“Glen Grove”), which owned valuable rental property. Mr. Edwin Hyde, who exercised de facto control over both Glen Grove and 129, agreed that Glen Grove was to provide guarantees and security obligations as part of the settlement. However, Glen Grove was not a signatory to the settlement agreement. 129 subsequently failed to fulfill its obligations under the settlement and 119 sought to collect from Glen Grove.
In finding Glen Grove liable, the Ontario Court of Appeal used the agency relationship that existed between the defendant companies to find liability when the companies, having separate legal personalities, would otherwise not have been liable.
The Ontario Court of Appeal held that since 129 acted on its own behalf and on behalf of Glen Grove as its agent, Glen Grove was liable for the obligations in a negotiated settlement to which it was otherwise not a true party.
Mr. Hyde had previously owned Glen Grove, but after he was petitioned into bankruptcy, he transferred the entirety of his interest in Glen Grove to Mrs. Hyde. However, Mr. Hyde maintained full de facto control over Glen Grove, as well as over 129. Glen Grove had previously made several offers to Mr. Hyde’s trustee in bankruptcy, but ultimately 129 made an offer to purchase the receiver’s proof of claim and related debts, which formed the basis for a settlement. The priority throughout was to protect Mrs. Hyde from any proceedings related to the share transfer.
One of the main questions at trial and on appeal was whether 129 acted as Glen Grove’s agent in providing the charge and guarantee as part of the settlement so as to bind Glen Grove to perform those obligations.
The trial judge had accepted that there was no evidence 129 was acting as agent for Glen Grove, but found her companies liable for the guarantee and charge on the basis that Mrs. Hyde relied on the closeness of the companies and the single directing mind to her advantage to secure the benefit that Mr. Hyde’s transfer of Glen Groves shares to her would not be set aside, and so she could not go back and dispute that control in order to shield her companies.
The Court of Appeal recognized that whether an agency relationship existed was a question of fact and the trial judge’s findings were entitled to deference. However, the Court of Appeal concluded that the trial judge ignored important relevant evidence which supported the conclusion that 129 acted not only on its own behalf, but also on behalf of Glen Grove in concluding the settlement.
Notably, the parties did not argue the appeal on the basis of agency, but the Court of Appeal found it appropriate to discuss the issue and decide on this basis.
Specifically, the Court of Appeal found that Glen Grove and 129 had intended to create an agency relationship and Glen Grove authorized 129 to act as its agent in negotiating and providing security under the settlement. This was supported by the following facts, among others:
- Glen Grove had made offers to purchase assets in Mr. Hyde’s estate, which was a factor in assessing whether 129 was carrying out a task assigned to it by Glen Grove;
- 129 had no money and no assets, which was understood by all parties. Glen Grove even paid some of 129’s legal fees, which supports the inference of an agency relationship;
- Glen Grove Management Inc., which was a related company, paid some of the settlement funds, and was operated from the same premises as Glen Grove and later amalgamated with Glen Grove;
- Counsel for Glen Grove proposed that the settlement would include a mortgage on the property which was in Glen Grove’s exclusive power to grant;
- Counsel for Glen Grove was given instructions, on Glen Grove letterhead, by Mr. Hyde, to prepare a mortgage on the Glen Grove property; and
- The only way that counsel for Glen Grove could have accepted instructions from 129 was if it was acting on Glen Grove’s behalf.
The Court of Appeal cited Creston Moly Corp v Sattva Capital Corp, 2014 SCC 53, for the statement that the settlement must be interpreted in light of the agency relationship. The objective intent was that Glen Grove was bound to perform the obligations in the settlement.
Principled Exception to Privity of Contract
Privity of contract as between Glen Grove, as a third party, and the parties to the settlement agreement was not directly addressed by the parties on appeal and so this case was not decided on that basis. However, Weiler J.A. considered the principled exception to the doctrine of privity of contract and stated that the three criteria outlined in the case of Seip & Associated Inc v Emmanuel Village Management Inc., 2009 ONCA 222 were present here and suggested that had the parties argued on that basis, liability might have been imposed based on the principled exception to privity of contract. Those three criteria are:
- the parties to the initial agreement intended to impose an obligation on the third party;
- the activities of the third party, upon which basis the parties sought to impose liability, were within the scope envisaged under the agreement; and
- the third party had knowledge of the provision assigning it liability and, by its conduct, the third party assumed the agreement.
In her concurring opinion, Epstein J.A. disagreed with Weiler J.A.’s consideration of this issue, stating that this third party liability exception is a relatively uncharted doctrinal area and she could not be taken to agree that this exception was available on the facts of this case. This issue was left to be decided another day.
Practical Implications of this Decision
When closely held companies operate with a single directing mind and have very closely related businesses, it would be prudent to consider not only whether a court might pierce the corporate veil to find a related entity liable, but also the implications of a possible agency relationship that may be created between the companies. In this case, the Courts did not find it appropriate to look beyond the separate legal personalities of the companies, but did find it appropriate to infer an agency relationship based on the conduct of the parties.
Given this decision, it may be important to consider carefully whether the actions of one company could support the inference of an agency relationship. If so, it may not matter that the companies are legally distinct corporate personalities since one may have the ability to bind the other.
1196303 Ontario Inc v Glen Grove Suites Inc, 2015 ONCA 580
Date of Decision: August 26, 2015
agency relationship doctrine of privity of contract Ontario Court of Appeal