You just discovered that one of your company’s directors or a senior employee has been engaging in a fraud. One of the first things I get asked in situations like this is whether the conduct of the employee/director will be treated as the conduct of the company generally. Can the company distance itself from its agent’s conduct? It matters for a variety of reasons, including the exposure to civil liability to third parties and the possibility of criminal charges.
Les Leyne in his Times Colonist article The Ugly Side of Deregulating Beauticians illustrates a recent situation like this. He reported on the dismissal of a fraud claim by the Cosmetology Industry Association of B.C. ("CIABC") against one of its members for a fraud perpetrated in cahoots with a CIABC director. His point was that deregulation of an industry is not always a good thing but from a legal point of view, the important point is that where the actions of the fraudster are apparently for the benefit of the company (no matter how misguided), the courts will treat the conduct as that of the company.
What this means is that the company is not going to be able to recover from others any loss it suffered. It may also be exposed to claims by the victims of the fraud and cannot defend by saying it was the employee, not us. This is because the company will be treated as a party to the fraud (through the actions of its misguided employee/director). In such cases, the legal principle known as the “corporate identification doctrine” applies. It says that where a company acts through one of its “directing minds” and is involved in a fraud, it is a party to that fraud and must bear the consequences.
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