What is the standard of competence that directors must meet in carrying out their duties?
Serving as a corporate director in a corporation governed by the Canada Business Corporations Act (“CBCA”) imposes various duties on an individual. Such duties include a duty to manage, a fiduciary duty, and an obligation to disclose conflicts of interest.
Among these duties, section 122(1)(b) of the CBCA also imposes a duty of care on directors that reads as follows:
122 (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
This duty to be reasonably prudent cannot, in itself, ground a claim against a director. Rather, this standard informs the courts’ view of what behavior should be considered acceptable in the context of a claim brought under another provision – most often an oppression claim based on s. 241 of the CBCA, but occasionally in tort claims brought by third parties such as corporate creditors.
Courts want to see that directors seek out the information necessary to make a decision, carefully consider that information, and generally take the time to examine an issue thoroughly. When directors have done this, then courts will be very reluctant to find fault with the resulting decision. The fact that a given decision may have turned out badly for a corporation is not determinative of any breach of duty on the part of the directors. Canadian courts apply the “business judgment rule” as a general approach. According to this rule deference should be given to corporate decision-makers, in recognition of the risk and competition inherent in any competitive business environment.
The Supreme Court of Canada addressed the balance between deference and holding directors accountable for breaching their duty of care as follows:
In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.
Corporate directors in Canada should be aware of the “reasonably prudent” duty of care they owe in making decisions on behalf of the corporation. Similarly, anyone seeking to advance a claim against a director personally should first consider whether the director’s conduct could be considered sufficiently unreasonable and imprudent to give rise to liability. As long as a director can demonstrate that they took care in reaching their decision, the courts will be deferential – even if the results for the corporation or other stakeholders were negative.
This blog post was written by Brett Hodgins, a member of the Commercial Litigation team. He can be reached at 613-369-0379 or at email@example.com.