Harvey Credit Union Ltd. v. G.H. Ward and Partners
Harvey Credit Union Limited, plaintiff, and
G.H. Ward and Partners, Ward and Gregory, Ward and Mallette,
J. Terrance Crawley, Raymond E. Neal, J.D. Robertson, W.C.
Steyn, Walter A. Gregory, Allan Ure and Enid Monaghan,
Fred Webb, George Dunn, Randy Dupuis, Norman Sequin, Lloyd
Lesperance, Lenard Thompson, Walter Boerner, Kenneth
MacKenzie, Martin Dupuis, Ron Dupuis, Rudy Primeau, Norman
Demcie, Paul Lecours and Rick Dumais, third parties
 O.J. No. 1040
128 D.L.R. (3d) 656
15 B.L.R. 307
24 C.P.C. 209
11 A.C.W.S. (2d) 383
No. 4595/81 A
Ontario Supreme Court - High Court of Justice
Motions Court - Toronto, Ontario
Heard: October 30, 1981.
Judgment: November 16, 1981.
R.G. Colautti, for the applicant.
R. Murray, for Enid Monaghan.
L.P. Renaud, for the third parties.
A. Farrer, for the defendants other than Enid Monaghan.
1 STEELE J.:-- The plaintiff applies for an order striking out the third party notice and the statement of claim of the defendants (other than Enid Monaghan) against the third parties. The plaintiff's action is against most of the defendants for damages for breach of contract and negligence in the preparation of financial statements by the defendants as auditors appointed by the plaintiff under the provisions of The Credit Unions and Caisses Populaire Act, 1976, S.O., chap. 62 (now R.S.O. 1980, c. 102). It is further alleged that the auditors were to report directly to the board of directors of the plaintiff. The plaintiff specifically alleges that the auditors negligently prepared an inaccurate financial statement upon which the plaintiff's directors relied in declaring a dividend to its members and that this dividend had the effect of impairing the plaintiff's working capital which caused damages to it. It is also alleged that the auditors specifically advised the plaintiff to declare a dividend.
2 The auditors deny any negligence or that they advised the plaintiff to declare a dividend. In any event, they allege that the directors of the plaintiff did not specifically rely on the financial statements in declaring the dividend, and that the plaintiff itself was negligent in failing to establish or enforce lending procedures and guidelines. The auditors allege that if there was any loss it was caused solely by the negligence, breach of duty or want of care of the officers and directors of the plaintiff. The plaintiff has not brought action against its own directors as it would appear to have the power to do under the provisions of section 78(2) of The Credit Unions and Caisses Populaire Act.
3 The auditors have commenced third party proceedings against all of the directors of the plaintiff. In the third party notice they seek contribution and indemnity from the directors on the basis that, if the plaintiff's capital was impaired, such impairment was caused solely by the negligence, breach of duty or want of care of the directors and, in addition, by the failure of the directors to comply with the statutory provisions of The Credit Unions and Caisses Populaire Act. Section 18 provides in part as follows:
78.(1) The board of directors shall not declare and the credit union shall not pay any dividend when the credit union is insolvent, or any dividend the payment of which renders the credit union insolvent or that diminishes its capital.
(2) The directors who vote in favour of or consent to the resolution authorizing the declaration of a dividend are jointly and severally liable to the credit union to the extent of the amount of the dividend so declared and paid or such part thereof as renders the credit union insolvent or diminishes its capital.
4 The plaintiff's present application is based on the submission that the directors are the alter-ego of the plaintiff and that a third party action as against them does not lie, but that any legitimate claim the defendants may have by reason of the acts or omissions of the plaintiff's board of directors must be pleaded in defence and that If any negligence is proven then the plaintiff's action may fall to the extent that any such negligence is proven. This would depend upon a finding at trial that the directors had acted within the scope of their authority. However, the defendants plead that the directors were acting outside their authority. In Clarkson Company Ltd. v. Kapp et al.; Wagman et al. Third Parties (1967), 1 O.R. 592, a third party proceeding was allowed to stand where the action was commenced on behalf of the plaintiff company against the directors of the company for breach of a similar provision of The Corporations Act, R.S.O. 1960, c. 71, and the directors added the auditors as third parties alleging negligence against them. I see no reason in equity why the reverse should not apply if it is permitted in law.
5 The plaintiff also alleges that the third party action would tend to embarrass and delay a fair trial because the defendants have effectively prevented the plaintiff from prosecuting the action by adding as third parties the very persons who actually give instructions on behalf of the plaintiff and that it would allow the defendants to obtain discovery of persons that they would not otherwise be entitled to.
6 While auditors normally must work closely with management and directors of companies in order to perform their function, it is the members or shareholders of the company who appoint the auditors and not the directors. The auditors' duty appears to be owed to the company and if they are negligent or do not properly perform their duties, their liability is to the company. In many aspects, the directors are the alter ego of the company but by statute the directors appear to separately owe a duty to the company. While the auditors may not have a separate cause of action against the directors, it may be that the evidence at trial would disclose that both were negligent or failed in their respective functions. If only the auditors are defendants, then regardless of what degree of negligence may be found judgment would go only against the auditors if it were found that the directors had operated outside their authority. In my opinion, section 6 of The Negligence Act, R.S.O. 1980, c. 315, which provides as follows, is applicable:
Wherever it appears that a person not already a party to an action is or may be wholly or partly responsible for the damages claimed, such person may be added as a party defendant to the action upon such terms as are considered just or may be made a third party to the action in the manner prescribed by the rules of practice for adding third parties.
7 The Legislature has given the right to add a third party and, once added, the normal rule with respect to striking out a third party notice applies. That rule was stated in Swayle v. Canadian Pacific Railway Co. (1912), 25 O.L.R. 492 at 505 as:
... The real question should be left to the trial; and such applications should form no exception to the general rule that the rights of the parties should not be disposed of on summary applications.
8 In Pettigrew v. Grand Trunk Railway Co. (1910), 22 O.L.R. 23 at p. 25, the rule was stated as:
The rights of the parties are not to be finally determined on the interlocutory motion for directions, except in the plainest cases, and it is enough that the plaintiff has made a claim against the defendants in respect of which there is a prima facie right to relief over.
9 In the present case the defendants have made a prima facie claim for relief over against the third parties and therefore the issue should be left until trial. The plaintiff may be embarrassed by the third party action taken against its own directors and some inconvenience and delay may be caused: however, this must be weighed against the more serious possible injustice to the defendants who might have judgment given against them for the total amount with no claim against the directors of the plaintiff even if contributory negligence were found.
10 For these reasons the application is dismissed with costs to all defendants in the cause.