1975]
COMMENTS – COMMENTAIRES
The Strict Ethic of the Equitable Principle:
A Comment on Canadian Aero Service v. O’Malley
Introduction
It is perhaps common knowledge that the power to manage the
affairs of the modem corporation vests in the board of directors.1
It is also common knowledge (at least in business circles) that direc-
tors rarely do in fact manage the company
except perhaps in
closely held corporations –
and that this task is generally entrusted
to the management, and more specifically, to the president and other
executive officers.3
–
While the fiduciary duties of directors have been the subject of
much study, only fleeting references are to be found on the question
of the officer’s fiduciary duties towards the company.4 The reason
may very well be that most cases involving breaches of fiduciary
duties in the corporate context have dealt with individuals who
were directors as well as officers.’ In such cases, consequently, the
court would assume a priori that the individual was a fiduciary by
virtue of his position as director and consideration of the question
of his liability qua officer would therefore be mere surplusage.
In Canadian Aero Service Ltd. v. O’Malley et al.” the Supreme
Court explored the scope of the officer’s fiduciary duty qua officer
1 In letters patent jurisdictions, the power to manage the company is vested
in the board of directors as an incident of incorporation by statutory pro-
visions such as s.97(1) of the new Canada Business Corporations Act,
S.C. 1974-75, c.33.
2 Taylor, The Role of Today’s Director (1974) Bus.Q. 47. See also Koontz
and O’Donnell, Principles of Management: An Analysis of Managerial Func-
tions 5th ed. (1972), 384; and Palmer, “Directors’ Powers and Duties” in
Ziegel (ed.), Studies in Canadian Company Law (1972), 365-366.
3 This is done via delegation. See, for example, s.116 of the new Canadt
Business Corporations Act, supra, f.n.1.
4See Gower, The Principles of Modern Company Law 3d ed. (1969), 518;
and Palmer, supra, f.n.2, 369.
5 See Note, Corporate Opportunity (1961)
In
Canadian corporate opportunity cases, the defendants have usually been
directors and officers. See, for example, Cook v. Deeks (1916) 1 A.C. 554, 559
(P.C.); Peso Silver Mines v. Cropper (1966) 54 W.W.R. 329 (B.C. CA.); 58
D.L.R. (2d) 1 (S.C.C.).
74 Harv.L.Rev. 765, 769.
I (1974) 40 D.L.R. (3d) 371, hereinafter referred to as Canaero.
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and irrespective of whether or not he is a director as well.7 Con-
sequently, the Canaero decision represents a definitive extension of
fiduciary duties to officers via the rules of agency, based upon a
functional approach.
The Canaero decision is of particular interest for another reason.
Traditionally, there have been two legal principles applicable to
corporate opportunity cases: namely, the profit and conflict rules.8
In the Canaero decision, however, the Supreme Court of Canada
adopted a recent trend 9 which refuses to consider these two rules
as “exclusive touchstones of liability”, and proceeded to impose
liability for breach of fiduciary duty on an entirely new basis, i.e.,
on the basis of the corporation’s “continuing interest” in the oppor-
tunity. However, it is unclear whether this is a new ground of
liability or whether it is really the conflict and profit rules in dis-
guise, extended to a situation where the agent has left the corporation
before taking personal advantage of the “corporate opportunity”.
In any case, it is clear that, as a result of the Canaero decision,
corporate opportunity cases will henceforth be dealt with as causes
d’esp~ces requiring a rigid application of a “strict ethic” to compel
promoters, directors and managers to obey “norms of exemplary
behaviour”. 0
The Facts and the Judgments
The facts of the Canaero decision were the following: Canadian
Aero Service Ltd. (“Canaero”) was a wholly owned subsidiary of an
American corporation which in turn was controlled by Litton In-
dustries. Canaero’s main business was topographical mapping and
geophysical exploration, a highly specialized business which required
7S.117(1)(a) of the new Canada Business Corporations Act, supra, f.n.1,
expressly imposes fiduciary duties on officers as well as directors and it may
therefore be seen as a codification of the common law on this point.
8 Both these rules apparently owe their origin to a statement by Lord
Herschell in Bray v. Ford [1896] A.C. 44 (H.L.):
“It is an inflexible rule of a Court of Equity that a person in a fiduciary
position … is not, unless otherwise expressly provided, entitled to make
a profit; he is not allowed to put himself in a position where his interest
and duty conflict” (at 51).
See generally McLean, The Theoretical Basis of the Trustee’s Duty of Loyalty
(1969) 7 Alta.L.Rev. 218.
9 See New Zealand Netherlands Society “Oranje” Inc. v. Kuys and
the Windmill Post Ltd. [1973] 1 W.L.R. 1126, [1973] 2 All E.R. 1222, [1973] 2
N.Z.L.R. 163. See generally Sugarman, Seeing Through the Double-Dutch of
Corporate Opportunity? (1974) 52 Can.Bar Rev. 280.
10 Supra, f.n.6, 384.
19751
COMMENTS – COMMENTAIRES
competent staff. Among the members of the staff were the defendants
O’Malley and Zarzycki, who were respectively president and executive
vice-president of Canaero. Neither man had actually served on the
board of directors of the company.oa
. Since Canaero’s business success hinged on its obtainment of con-
tracts with foreign countries through the intermediary of the Ex-
ternal Aid Department, the defendants1 were required to perform
promotional work on behalf of Canaero with a view to obtaining
contracts for topographical mapping. Canaero had sent the de-
fendants to Guyana on several occasions for the purpose of develop-
ing and procuring a contract for the topographical mapping of
Guyana (“the Guyana project”). The defendants’ efforts were
temporarily unproductive due to the political climate in Guyana
at the time. Subsequently, however, negotiations were resumed and
the defendants were once again charged with this responsibility.
Just as the Guyana contract was about to materialize, however, the
defendants resigned their positions in Canaero on the apparently
justified pretext that their freedom of action was curtailed by the
domineering Litton Industries.
Shortly prior to Canaero’s acceptance of the resignations, the
defendants incorporated a company named Terra Surveys Inc. whose
line of business was identical to that of Canaero. The Canadian
External Aid Office was informed of the existence of this new com-
pany. Terra Surveys, in competition with several other companies
including Canaero, was invited to submit a proposal for the mapping
of Guyana. Terra’s proposal was subsequently accepted and it was
awarded the Guyana contract. An agreement was signed with the
Government of Guyana to carry out the project for the sum of
$2,300,000, the same amount that Canaero had requested if it
obtained the contract. Canaero felt aggrieved by the situation and
instituted an action against the defendants and Terra Surveys 2 for
an accounting and payment of profits.
:La Although all three defendants had been appointed to the board of
directors, the Trial Judge found as a fact that “no meetings of the board of
directors or annual meetings of the company were.ever in fact held” after the
control of Canaero was acquired by Litton in 1964. See infra, f.n.13, 11-12 per
Grant I.
11 The “defendants” will henceforth be used to designate O’Malley and
Zarzycki. The liability of Wells, an inactive director of Canaero who was never
an officer thereof, will be considered separately.
12 The defendants, if liable, could not escape the effects of a fiduciary duty
by attempting to act through a corporation: Patton v. Yukon Consolidated Gold
Corp. [1934] 3 D.L.R. 400 (Ont. C.A.).
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The company sued the defendants in the High Court of Ontario
for alleged breach of their fiduciary duties as directors thereof. It
alleged that the defendants had breached their duty of loyalty and
good faith in appropriating to themselves, shortly after their resig-
nations, a corporate opportunity (the Guyana project) belonging to
the company. The defendants O’Malley and Zarzycki having raised
the irregularity of their appointment as directors as a defence, the
principal issue that arose was the precise nature of the relationship
between the defendants and the plaintiff company and whether or
not the alleged irregularity in their appointment had any bearing on
that relationship. In other words, the problem was primarily one
of characterization: were the defendants employees or fiduciaries?
Should the Court apply the principles of competition or those of
corporate opportunity?
The Trial Judge held that he did not consider it necessary to
determine whether or not the defendants were in fact directors’ s and
stated that “[i]f there is liability on their part in this case, it must
flow more from their activities as senior officers than as directors”.14
Grant J., basing himself on Lord Russell of Killowen’s formulation of
the profit rule in Regal (Hastings) Ltd. v. Gulliver,15 stated the test
of liability as follows:
It is not the coming upon or learning of the proposed contract while
directors [or senior executive officers] that establishes liability, but rather
obtaining the same because of such fiduciary position and in the course of
their duties as such.16
The Trial Judge held that although the defendants owed a fiduciary
duty to Canaero by reason of their positions as senior managerial
13 (1970) 61 C.P.R. 1, 16 per Grant J.
14 Ibid., 15.
15 [1942] 1 All E.R. 378, 389 (H.L.):
“In the result, I am of the opinion that the directors standing in a
fiduciary relationship to Regal in regard to the exercise of their powers
as directors, and having obtained these shares by reason and only by
reason of the fact that they were directors of Regal and in the course of
the execution of that office, are accountable for the profits which they
have made out of them” (italics added).
Lord Wright stated the profit rule as follows:
“…an agent must account for net profits secretly (that is, without the know-
ledge of his principal) acquired by him in the course of his agency” (at 392;
italics added).
16 Supra, f.n.13, 39 (italics added). This test is based on a narrow interpreta-
tion of Regal, supra, f.n.15, and Peso Silver Mines Ltd., supra, f.n.5. This
narrow interpretation has been criticized by Beck, The Saga of Peso Silver
Mines: Corporate Opportunity Reconsidered (1971) 49 Can.Bar Rev. 80, 105-106,
but approved by Ballem, Comment, (1952) 30 Can.Bar Rev. 179, 194-185.
19751
COMMENTS – COMMENTAIRES
officers thereof,17 no breach of duty had been established for two
reasons. Firstly, the defendants had not used any confidential in-
formation belonging to Canaero in their preparation of the Terra
proposal. 8 Consequently, they did not obtain the Guyana contract
because of their fiduciary position. Secondly, since the defendants
had resigned before they obtained the said contract, they did not
derive the impugned profit while in the course of their duties as
such. For these reasons, Grant J. dismissed Canaero’s action. Canaero
appealed the decision.
In the Ontario Court of Appeal,8M MacKay J.A. examined the
power structure within the Litton Group and concluded that the
defendants’ appointment to their respective positions as president
and vice-president was irregular 19 and that their authority was
curtailed to such an extent” that they were mere employees “with
imposing titles but without the authority ordinarily attaching to such
titles”.21 As employees, therefore, the defendants were not “within
the classification of persons to whom the [equitable] principle…
applied”; 22 and, even assuming that they were, they did not fall
17 Grant J. adopted Professor Gower’s thesis, supra, f.n.4, that:
“… these [fiduciary] duties, except insofar as they depend on statutory
provisions expressly limited to directors, are not so restricted but apply
equally to any officials of the company who are authorized to act on its
behalf and in particular to those acting in a managerial capacity. This is
a matter of considerable importance now that it is common for the
to be delegated by the board [of
management of public companies
directors] to a smaller body.”
See also Bell v. Lever Bros. [1932] A.C. 161; Reading v. Att.Gen. [1951] A.C.
507; and Re Faure Electric Accumulator Co. (1889) 40 Ch.D. 141, 151.
18 Supra, f.n.13, 18.
18a (1971) 23 D.L.R. (3d) 632.
19Ibid., 634 per MacKay IA.: the defendants “were entered on the books
as holders of these positions on the instructions of a senior official of Litton”.
20 The curtailment of the defendants’ administrative authority consisted in
the fact that they “were required to obtain approval from Litton for any
expenditures including travelling expenses more than $100”, and that they “hid
no authority to employ or discharge senior personnel”: ibid. One should not,
however, confuse administrative functions with agential functions such as
negotiating a contract on behalf of the company. It must be pointed out
that the Court of Appeal implicitly endorsed Grant J.’s view that promotional
work does not constitute negotiation and that the negotiation stage had not
yet been reached at the time of the defendants’ resignations. See infra, “Prior
Negotiations: an Agential Function”.
21 Ibid.
22Ibid., 642. Mackay IA. appears to be of the opinion that only directors fall
within this classification. A more correct view, it is submitted, is that taken
by Arnup J. in Laskin v. Bache & Co. [1972] 1 O.R. 465, 472, 23 D.L.R. (3d) 385,
392 (C.A.):
“In my opinion the category of cases in which fiduciary duties and
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within the Regal principle2 for the reasons stated by the Trial Judge.
The Supreme Court of Canada, in a unanimous decision delivered
by Laskin J. (as he then was), held that the amount of control
exercised by Litton Industries over the officers of Canaero was mere
“supervision” which did not reduce Zarzycki and O’Malley to mere
marionettes. z a Rather, the defendants were “top management”
whose duty to the company was “similar to that owed to a corporate
employer by its directors”. 24 The basis for thus assimilating the
defendant officers to directors was that they had acted as agents of
the company in respect to the Guyana project: they had conducted
negotiations on behalf of Canaero in their attempt to procure the
Guyana contract and could not subsequently negotiate on their own
behalf. 25 Secondly, the Court held that the Trial Judge’s narrow
conception of the equitable rule as requiring the profit to be obtained
while in the course of duty was mistaken in view of Canaero’s prior
and continuing interest in the opportunity.2
It is submitted that
the Canaero decision rests upon these two “touchstones of liability”;
namely, the prior negotiations and the company’s continuing interest.
I. Prior Negotiation: An Agential Function
It is submitted that upon a functional analysis2 of the defendants’
responsibilities, the Supreme Court judgment regarding them as
agents of Canaero is uncontroverted by the facts. The functional
approach, as the name suggests, is concerned with functions, not
obligations arise from the circumstances of the case and the relationship
of the parties is no more ‘closed’ than the categories of negligence at
common law.”
2 Supra, f.ns.15 and 16.
23a The defendant Wells however, was at no time an officer of Canaero and
Litton’s control effectively prevented him from performing agential functions
with respect to the Guyana project. In effect, he did not participate in any
manner whatsoever in the promotional work done by O’Malley and Zarzycki.
Consequently, the scope of Wells’ agency was restricted, and the fact that he
was nominally a director could not result in condemnation if the facts showed,
as they did, that he had not participated in the promotional work on behalf
of Canaero.
24 Supra, f.n.6, 380. Laskin J. adopted Gower, quoted supra, f.n.17.
25Ibid., 382.
26 Ibid., 390-391.
2 7It is to be noted that the nomenclature used herein to describe the
various approaches is novel in the company law context. The idea, however,
is not novel. See generally Sugarman, supra, f.n.9, 281, where he states that:
“[e]mphasis on the scope of duty prevents the determination of the ambit
of the beneficiary’s interest [and the fiduciary’s duty] from being tele-
scoped into a question-begging exercise”.
19751
COMMENTS – COMMENTAIRES
titles. It consists in an examination of the scope of duties to de-
termine the fiduciary’s liability and, indeed, to determine whether
or not he is a fiduciary. An illustration of this approach is Cook
v. Deeks2 7a where Lord Buckmaster stated that the question whether
the plaintiff company was entitled to claim from the defendants the
benefit of a certain contract
… cannot be properly answered by considering the abstract relationship
of directors and companies; the real matter for determination is what, in
the special circumstances of this case, was the relationship that existed
between Messrs. Deeks and Hinds and the company that they controlled.
Now it appears plain that the entire management of the company, so
far as obtaining and executing contracts in the east was concerned, was
in their hands, and, indeed, it was in part this fact which was one of the
causes of their disagreement with the plaintiff2 1 b
Where the individual acts in a representative capacity, fiduciary
duties flow from the fact of agency, not from the fact that he is
called a “director” or “officer”. As Professor Palmer has pointed out,
… fiduciary obligations are imposed on directors because of the work
they perform. It is for this reason that the same duties may extend to the
members of the management whether or not they are also directors:28
The functional approach, with its emphasis on function and scope
of duty, is to be contrasted with what may be called the “nominalist”
fallacy exposed by defence counsel in Phipps v. Boardman. There it
was argued that it is a fallacy to
… first impose [on the defendants] all the duties and obligations of a
general agent and then ask whether, on that assumption, the [defendants]
have divested themselves of their fiduciary duty. The first question is
whether the [defendants] were agents at all, and if so, what were the
terms on which they were expressly or impliedly appointed28 a
The question, therefore, is whether the functions actually per-
formed by defendants O’Malley and Zarzycki indicate that they acted
as agents of Canaero with respect to the Guyana contract. A brief
review of the work performed by the defendants indicates that in
1961 O’Malley had engaged in “[p]romotional work to persuade the
local authorities [of Guyana] that Canaero was best equipped to
carry out the topographical mapping”. 29 In May 1962, Zarzycki had
spent several days in Guyana meeting with government officials. 0
In 1965, Zarzycki prepared a “sales-slanted” proposal which was
27a Supra, f.n.5.
27b Ibid., 561.
2 8 Supra, f.n.2, 369 (italics added).
28a [1967] 2 A.C. 46, 63.
29 Supra, f.n.6, 375 per Laskin J.; see also Grant J., supra, f.n.13, 16.
3o Supra, f.n.6, 375.
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submitted to a Guyana cabinet minister for consideration, 1 and
just prior to their resignations, both O’Malley and Zarzycki had met
with the Prime Minister of Guyana during his visit to Ottawa.3 2
Under these circumstances, Laskin J. concluded that the defendants
were agents of the company with respect to the Guyana contract.
As agents, therefore,
O’Malley and Zarzycki stood in a fiduciary relationship to Canaero, which
in its generality betokens loyalty, good faith and avoidance of a conflict
of duty and self-interest. Descending from the generality, the fiduciary
relationship goes at least this far: a director or a senior officer like
O’Malley or Zarzycki is precluded from obtaining for himself, either
secretly or without the approval of the company (which would have to be
properly manifested upon full disclosure of the facts), any property or
business advantage either belonging to the company or for which it has
been negotiating; and especially is this so where the director or officer is
a participant in the negotiations on behalf of the company.33
Reference has been made several times to the fact that the
defendants performed promotional work on behalf of Canaero.
Laskin J. refers to this work as “negotiations”Y4 But while there is
no doubt that actual negotiation of a contract on behalf of a company
constitutes an agential function 5 which, in the absence of full dis-
31 Ibid., 378; Grant J., supra, f.n.13, 17-18, describes the precise nature of this
proposal:
“The proposal is obviously an attempt to persuade [the Guyana] govern-
ment to undertake the work therein with the hope that by giving them
the guidance that the proposal provides and other help in connection
with the application for the loan necessary to provide funds therefor, that
the contract for the work might be directed to the plaintiff company.
Dr. Zarzycki describes the same as half technical and half sales promotion
but actually more sales slanted” (italics added).
32 Supra, f.n.6, 377; supra, f.n.13, 19.
n Supra, f.n.6, 381-2 (italics added).
34 Ibid.
3 5 See Cook v. Deeks, supra, f.n.5. In this case, the Toronto Construction
Company was controlled by four directors, the three defendants and the
plaintiff. The defendants and the plaintiff Cook had a dispute over the
management of the company, whereupon the three defendants secretly agreed
amongst themselves that they would negotiate on their own behalf for a con-
tract in which the company was interested. The defendants continued as
directors of the company, and it was only after the negotiations were com-
pleted that the defendants formed a new company to execute the contract
they had appropriated to themselves. The Court held that the defendants
“were not at liberty to sacrifice the interests which they [were] bound
to protect, and, while ostensibly acting for the company, divert in their
own favour business which should properly belong to the company they
represent” (per Lord Buckmaster, at 563).
19751
COMMENTS – COMMENTAIRES
closure by the fiduciary36 or cessation of interest on the part of the
corporation, ‘
7 prohibits the agent from subsequently negotiating for
the contract on his own behalf, it is submitted that there was ample
evidence to suggest that the defendants had not in fact negotiated
but had merely done “promotional work” 38 on behalf of Canaero.
The Supreme Court decision seems to be predicated on the as-
sumption that the defendants had negotiated or that promotional
work constitutes negotiation. The work performed by the defendants
consisted in “manoeuvering” “to get the selection of the contractor
made in Guyana”,39 and attempting to persuade the authorities that
Canaero was the best contractor for the job. It did not involve the
actual negotiation of the terms of the eventual contract. This is
clear from the finding of fact made by the Trial Judge in the High
Court of Ontario:
It is to be noted that the proposals are not based on price but the purpose
of the [External Aid Department’s] report is the selection of the con-
tractor. Following that, the one chosen to do the work negotiates with
the [Canadian] Government as to price and other terms of the contract. 40
The implication here is that there is a distinction between
promotional work and negotiation, and that the negotiation stage
had not been reached when the defendants resigned from Canaero.
This is the reason why the Trial Judge did not think that the
… mere fact of learning of the contract or even doing extensive work and
preparation in attempts to secure the same for the plaintiff while they
36Furs Ltd. v. Tomkies (1936) 54 C.L.R. 583. It is not entirely clear what
facts the defendants in the Canaero case should have disclosed to their
principal. The Trial Judge held that there was “no obligation to tell the
employer about the application or the actual incorporation of Terra”.
Moreover, it was held that Canaero knew of the defendants’ association with
Terra on the day of Zarzycki’s resignation (O’Malley had resigned several days
before). See supra, f.n.13, 33. Since the obtainment of the Guyana contract by
the defendants was not a certainty at the time of their resignations, it is
submitted that the only duty to disclose, if any existed, related to the
defendants’ intention to compete with Canaero. LaskinJ., however, merely
refers to the duty to disclose in an obiter remark and does not suggest that
such a duty actually existed in the Canaero case: supra, f.n.6, 382, 384.
37 Peso Silver Mines Ltd. v. Cropper, supra, f.n.5. Some Canadian writers
have suggested that cessation of interest should be rejected as a defence. See
Beck, supra, f.n.16; and Prentice, Director’s Fiduciary Duties – The Corporate
Opportunity Doctrine [1972] 50 Can.Bar Rev. 623, 632.
3 8 The promotional work consisted in “persuading the local authorities that
Canaero was best equipped to carry out the topographical mapping”; supra,
f.n.6, 375 per Laskin J.
3 These are O’Malley’s own words in a letter to a senior officer of Litton
Industries: supra, f.n.13, 20.
40 Per Grant J., supra, f.n.13, 24 (italics added).
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were still in their offices for it, of itself prevents them, after severing
relations with their employer, from seeking to acquire it for themselves. 41
The Supreme Court judgment, however, can be interpreted as
meaning that promotional work constitutes part of the negotiation
process and is therefore an agential function which prohibits the
agent from subsequently negotiating on his own behalf. If inter-
preted too widely, this might mean that the slightest contact with
a corporate opportunity will render the corporate officer (or ex-
officer) liable to account if he subsequently obtains it for himself.
If interpreted this way, the Canaero decision may indeed unduly
restrict the officer’s post-employment right to compete with his
corporate employer,41a especially since the “strict ethic” of the equit-
able principle regards the absence of restrictive covenants and the
lack of confidential information 2 as irrelevant considerations. Never-
theless, this does appear to be consistent with the deterrent ap-
proach42 a in corporate opportunity cases, which requires directors
and officers to comply with “norms of exemplary behaviour”.43
These norms may vary according to whether the defendant is merely
a nominal director or an executive officer. Thus a nominal director
such as the defendant Wells is free to engage in post-employment
competition with his corporate employer, whereas executive officers
such as O’Malley and Zarzycki are not.
II. The Continuing Interest Doctrine: Beyond the Profit and
Conflict Rules?
Having ascertained that the defendants were agents of Canaero
with respect to the Guyana project, the problem then became whether
there had been a breach of the fiduciary duty flowing from that
relationship. As most of the decisions relating to breach of fiduciary
duty have been concerned with breaches while in the course of
duty,43
a the difficulty that arose in Canaero was that the contract for
41Ibid., 39 (italics added).
41a Palmer, supra, f.n.2, 382.
42 Laskin J., supra, f.n.6, 388, stated that the confidentiality of the information
has no relevance in determining whether there has been a breach of fiduciary
duty. See also Beck, supra, f.n.16, 111-112. For a discussion of the cases
relating to confidential information, see Wright, Confidentially Speaking Equity
in Industrial Property Matters (1970) 61 C.P.R. 53.
42a See generally Waters, Law of Trusts in Canada (1974), 619-620, 642, 651;
see also Beck, supra, f.n.16, 87.
43 Per Laskin J., supra, f.n.6, 384.
43a Regal (Hastings) Ltd. v. Gulliver, supra, f.n.15; Cook v. Decks, supra,
f.n.5; Peso Silver Mines Ltd. v. Cropper, supra, f.n.5. A notable exception is
Industrial Development Consultants v. Cooley [1972] 2 All E.R. 162. This
19751 .
COMMENTS – COMMENTAIRES
the Guyana project was not concluded by the defendants until after
they had resigned their positions as senior officers of Canaero. The
Trial Judge concluded that the defendants were not in breach of
their fiduciary duty because
[i]t is not the coming upon or learning of the proposed contract while
directors that establishes liability, but rather obtaining the same because
of such fiduciary position and in the course of their duties as such.44
The Trial Judge, therefore, saw the judicial formulations of the
equitable principle in Peso45 and Regal” as formulas within which
the facts of each case must fall in order for liability to ensueyt
Laskin J., however, considered this view as “too narrowly con-
ceived”48 and thought that it was a mistake
… to seek to encase the [equitable] principle … in the straitjacket of
special knowledge acquired while acting as directors or senior officers,
let alone limiting it to benefits acquired by reason of and during the
holding of such offices.49
After stating that the conflict and profit rules should not be
considered as “exclusive touchstones of liability”, 50 Laskin J. pro-
ceeded to impose liability on the defendants on the basis of what
may be called the “continuing interest” test. Although this test
seems to be referred to merely en passant,51 it is submitted that it
latter decision was not cited in the High Court and Court of Appeal of Ontario
because it had not yet been rendered. It was, however, cited in the Supreme
Court and it is submitted that this is one of the reasons for the diverging
views of the Supreme Court on this matter.
44Supra, f.n.13, 39 (italics added).
45 Supra, f.n.5, 8 per Cartwright J.
4 oSupra, f.n.15.
47 The Court of Appeal implicitly endorsed this view: supra, f.n.18a, 642.
48 Supra, f.n.6, 387.
49 Ibid., 390.
50 Ibid., 383.
51 Laskin J. refers to Canaero’s “priority” (at 390), Canaero’s “continuing
interest” (at 389), and to its “prior and continuing interest” (at 372). The
nature of this interest was clearly pecuniary. On the one hand, Canaero
had incurred expenses in preparing the Guyana project. It made preliminary
surveys and proposals, it sent its officers to Guyana to persuade the local
authorities that Canaero was best equipped to carry out the project, and it
for an aerodist (an airborne electronic distance-
even invested $75,000
measuring device) especially for that project. On the other hand, the
pecuniary interest was also the eventual profit that Canaero would derive if it
succeeded in obtaining the Guyana contract. LaskinJ. appeared to be sym-
pathetic towards Canaero because it “risked initiative and expenditure in
preparatory work for projects without assurance of return in the form of
contracts” (at 375). It is to be noted, however, that the Trial Judge regarded
these expenditures as deductible business expenses, similar to advertising,
which did not give Canaero more of a right to the corporate opportunity
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along with the prior negotiations –
constitutes –
one of the
“touchstones of liability” in the Canaero decision. In effect, it seems
logical to say that if Canaero had a prior and continuing interest
in the Guyana project, the defendants should have a corresponding
duty to pursue the opportunity on behalf of Canaero, or, having
resigned, to respect Canaero’s priority in the opportunity. Laskin J.
appears to base his judgment on that logic. It is because Canaero
had a prior and continuing interest that
O’Malley and Zarzycki continued, after their resignations, to be under a
fiduciary duty to respect Canaero’s priority, as against them and their
instrument Terra, in seeking to capture the contract for the Guyana
project.52
The defendants’ resignations prior to the maturation of the
project, therefore, did not operate to extinguish their liability for
breach of fiduciary duty. Put in another way, the defendants’ resigna-
tions could not operate to sever their accountability to Canaero
because their fiduciary duty survived the tenure of their offices.
The rationale for this proposition was admirably stated by Botein J.
in the American case Albert A. Volk Inc. v. Fleschner Bros. Inc. et al.:
Were the rule otherwise, the fiduciary obligation would disintegrate by
resignation of the fiduciary whenever the attraction of personal gain at
the expense of the cestui que trust proved stronger than what would
then be an unenforceable moral obligation5 3
That the defendants’ decision to resign may have been motivated
by a desire to enrich themselves can be inferred from the fact that
they “entered the lists in the heat of the maturation of the project”.”
In fact, the defendants’ resignations were prompted by several
factors, including their increasing disenchantment with the do-
mineering Litton Industries.55 However, the most important factor
was that the defendants learned that the Canadian Government had
adopted a policy of preferring Canadian controlled firms in the
awarding of external aid contracts. Since Canaero did not qualify
as a Canadian controlled firm, in all probability the defendants
than it otherwise would have had: supra, f.n.13, 48. The true pecuniary interest
involved, therefore, was the eventual profit to be derived from the Guyana
contract. The Supreme Court awarded Canaero $125,000 for the loss of such
contract.
52Supra, f.n.6, 390391 (italics added).
53 60 N.Y.S. (2d) 244, 245 (1945). See also Ex Parte James (1803) 8 Ves. 337,
32 E.R. 385, 390; Pre-Cam Exploration & Development Ltd. v. McTavish [1966]
S.C.R. 551; Mile-O-Mo Fishing Club Inc. v. Noble 210 N.E.(2d) 12 (1965);
Industrial Development Consultants Inc. v. Cooley, supra, f.n.43a.
54Supra, f.n.6, 391.
55 Supra, f.n.13, 26.
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COMMENTS – COMMENTAIRES
honestly56 thought that Canaero’s chances of success had diminished
considerably. Consequently, they decided to go into business for
themselves in an attempt to encourage “local initiative”. The Cana-
dian Government, however, had made the decision to invite Canaero
to submit a proposal several days before the defendants’ resigna-
tions. 7 It is for that reason that Laskin J., while considering the issue
of good faith to be irrelevant, found it difficult to believe that it was
mere coincidence that the defendants resigned when the project was
about to materialize, and suspected that their resignations “were
prompted by a wish to acquire for [themselves] the opportunity
sought by the company”.58
The case, it is submitted, could therefore have been decided
solely on the basis of Industrial Development Consultants Inc. v.
Cooleysa where Roskill J. held that the defendant, a former managing
director of the plaintiffs who resigned on the false pretext of ill-
health, had “embarked on a deliberate policy and course of conduct
which put his personal interest as a potential contracting party
with the Eastern Gas Board in direct conflict with his pre-existing
and continuing duty as managing director of the plaintiffs”. 9 In
Cooley the third party was unwilling to contract with the plaintiff
company; the Court held that the defendant’s duty as managing
director of the plaintiff company was precisely to “try and persuade
[the third party] to change their minds”.o
It can therefore be said that in Canaero (where the Government’s
policy was to prefer Canadian controlled firms in awarding con-
tracts), the defendants’ resignations at a moment when the Guyana
contract was about to materialize put them in a situation where their
personal interests came into conflict with their pre-existing and
continuing duty to pursue the contract on behalf of Canaero. Since
56 Ibid., 30. Grant J. held that “no scheme was devised [by the defendants]
that [Terra Surveys] should be used as an instrument to destroy Canaero’s
opportunity of getting the Guyana contract” (at 31). However, it should be
pointed out that good faith is irrelevant in determining whether there has
been a breach of fiduciary duty, as a fiduciary’s “liability to account does not
depend upon proof of mala fides”: Regal (Hastings) Ltd. v. Gulliver, supra,
f.n.15, 381 per Viscount Sankey; see also Laskin J., supra, f.n.6, 389.
57 The decision was taken on August 18, 1966. Canaero did not receive the
Government’s invitation to submit a proposal until August 23rd: supra, f.n.13,
23. Canaero accepted O’Malley’s resignation on the 26th and Zarzycki’s on the
29th of August. Wells’ resignation had been tendered in February, 1965.
8SSupra, f.n.6, 382.
s8a Supra, f.n.43a.
59 Ibid., 174 (italics added). See generally Prentice, supra, f.n.37.
60 Ibid., 176.
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the defendants’ resignations were not accompanied by disclosure
of their intention to compete, their positive duty to pursue the
contract on behalf of Canaero became transmogrified into a con-
tinuing negative “hands-off” duty to “respect Canaero’s priority” in
the opportunity. A continuing affirmative obligation would have im-
plied that the defendants were not entitled to resign until they had ac-
complished the mission with which they had been charged; namely,
the obtainment of the contract on behalf of Canaero.0 ‘ It is submitted
that Laskin I. did not go that far. He did, however, go farther than
Grant J. 2 and MacKay J.,3 both of whom appeared to content them-
selves with the finding that prior to their resignations the defendants
had done everything in their power to obtain the Guyana contract
on behalf of Canaero. Laskin J., however, did not think that sufficient
to exonerate the defendants and imposed upon them a negative duty
to avoid competing for an opportunity in which Canaero had a
prior and continuing interest.
Traditionally, the only defence open to a fiduciary in an action
for an accounting and payment of profits has been full disclosure
toP and approval by the principal or cestui que trust.0 5 Recently, how-
ever, a second defence seems to have developed: absence of conflict
between duty and interest as a result of the corporation’s cessation
of interest in the opportunity. 6 Laskin J. seems to have facitly
reaffirmed this new defence. He distinguished the Peso case, 6a where
it was held that the defendants were not required to account for the
profits they had made as a result of a speculative transaction con-
61 Fridman, The Law of Agency 3d ed. (1971), 303, says:
“Aside from any agreement between principal and agent, or any unilateral
act by either of them, the relationship between principal and agent will
terminate when the transaction which has been undertaken has been
performed.”
It is to be noted, however, that in the Canaero case there was a bilateral
act purporting to end the relationship: (1) the defendants’ resignations; and
(2) the plaintiff’s acceptance of these resignations. Consequently, no continuing
affirmative duty to obtain the contract on behalf of Canaero could be
presumed. Laskin J. ingeniously circumvented that difficulty by superimposing
a negative duty. This analytically tortuous reasoning can only be justified on
policy grounds: see supra, f.n.6, 384.
62 Supra, f.n.13, 21-22, 29.
63 Supra, f.n.18a, 636.
64 Furs Ltd. v. Tomkies, supra, f.n.36.
105 Ex Parte James, supra, f.n.53.
66 Peso Silver Mines Ltd. v. Cropper, supra, fn.5. Repeated pleas have been
made to reject such a defence: see Beck, supra, f.n.16; and Prentice, supra,
f.n.37, 632.
66a Supra, f.n.5.
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COMMENTS – COMMENTAIRES
cerning mining claims because the company’s interest in the claims
had ceased when the board of directors, acting in good faith, decided
not to acquire the claims. The implication was that because of the
company’s bona fide rejection of interest in the claims, there was
no possibility of conflict between duty and self-interest on the part
of Cropper, a director of the company.67 In the Canaero case, on the
other hand, the possibility of a conflict between duty and self-interest
was very real because the defendants had not disclosed their in-
tention to the shareholders or directors and there had not been any
rejection of the opportunity by the corporation.
Conclusion
It is submitted that if the foregoing analysis is correct, the
Canaero decision constitutes a reaffirmation of the conflict rule6 8
Nevertheless, it is to be noted that the conflict and profit rules will
no longer be considered as “exclusive touchstones of liability”, i.e.,
these judicial formulations of the equitable rule should not be
applied as rigid formulas within which the facts of each case must
fall in order for liability to ensue. The rationale for this flexible
approach is that “new fact situations may require a reformulation
of existing principle to maintain its vigour in the new setting”.69 It
was for this reason that Laskin I. adopted a case by case approach to
the problem of corporate opportunity:
The general standards of loyalty good faith and avoidance of a conflict
of duty and self-interest to which the conduct of a director or senior
61 Ibid. It is to be noted that Laskin I. also distinguished the Peso case on
the ground that “there was evidence that Peso had received many offers of
mining properties and … the acquisition of the particular claims out of
which the litigation arose could not be said to be essential to the success of
the company”: supra, f.n.6, 390. LaskinJ. is implicitly using the Lagarde
formula (“seizure by the executive of an opportunity of major importance
to the corporation”): Lagarde v. Anniston Lime & Stone Co. 126 Ala. 496, 28
So. 199 (1900). See generally Note, Corporate Opportunity (1961) 74 Harv.L.Rev.
765. It is submitted that Laskin I. rightly employed this test, as there was
evidence that Canaero had not obtained any contracts since 1964. See supra,
f.n.13, 21, where Grant I. cites a letter by the Canadian Secretary of State for
External Affairs to the president of the Air Transport Association of Canada
to the effect that “the last contract actually awarded to a wholly foreign
controlled firm was in 1964”.
68 See Aberdeen Railway Co. v. Blaikie Bros. (1854) 1 Macq. 461; Phipps v.
Boardman, supra, f.n.28a; Industrial Development Consultants Inc. v. Cooley,
supra, f.n.43a.
69 Supra, f.n.6, 383.
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[Vol. 21
officer must conform, must be tested in each case by many factors which
it would be reckless to attempt to enumerate exhaustively.10
It appears that Laskin J.’s approach in Canaero is quite similar
to that taken by Lord Green M.R. in Hivac Ltd. v. Park Royal Scien-
tific Instruments Ltd. where the learned Judge pointed out “the
danger of laying down any general proposition and the necessity
of considering each case on its facts”.71
It is submitted that the Canaero decision is itself a cause d’espace
and cannot be interpreted to have the effect of abolishing the conflict
and profit rules. Rather, it makes them two among many possible
guidelines to be used in determining whether there has been a breach
of a fiduciary duty. The introduction of this more flexible –
though
perhaps less predictable –
approach in Canadian company law will
likely make this area of the law even more uncertain. Nevertheless,
it is submitted that the conflict and profit rules will continue to be
useful “touchstones” in determining whether there has been a breach
of fiduciary duty under section 117(1)(a) 72 of the new Canada
Business Corporations Act.
Michelangelo Iacono*
70 Ibid., 391 (italics added).
71 [1946] 2 All E.R. 350, [1946] Ch. 169, 175. See also Phipps v. Boardman,
supra, f.n.28a, 123 per Lord Upjohn.
72Supra, f.n.1. This section reads as follows:
“117.(1). Every director and officer of a corporation in exercising his
powers and discharging his duties shall
a) act honestly and in good faith with a view to the best
interests of the corporation; ….
This section is a skillful attempt to codify the common law fiduciary duty;
see the Dickerson Report (1972), 81, para.237. It is “largely declaratory of the
common law”: Detailed Background Paper for the New Canada Business
Corporations Bill, 14.
* B.C.L. (McGill).
