By Ivan Merrow
Volkswagen (VW)’s ex-CEO Martin Winterkorn is being investigated for fraud allegations by German authorities in the wake of the company’s emissions rigging scandal. According to news sources, VW has come clean about distorting its cars’ emissions data, but the damage has already been done. Reuters reports that the German prosecutors’ criminal investigation of Mr. Winterkorn is based on “allegations of fraud in the sale of cars with manipulated emissions data.”
Mr. Winterkorn’s criminal investigation is underway in Germany. What if the Volkswagen scandal had originated in Canada? From what sources of law do directors and officers of Canadian companies face potential legal liability in similar situations?
Criminal penalties, quasi-criminal penalties, and civil law damages
In Canada, directors and officers’ potential liability exists in three distinct legal systems: criminal law, quasi-criminal law, and civil law. Had the VW scandal originated in Canada, the public may have pursued three different avenues for legal redress.
- Criminal prosecution by the Crown
The criminal legal system is federal. Its main purpose, among others, is to punish and denounce conduct deemed harmful to the public. In that respect, the Criminal Code applies in every Canadian province and territory. Police may investigate criminal allegations levied at directors and officers pursuant to the Criminal Code, which includes the s. 380 crime “fraud”:
- (1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretence within the meaning of this Act, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service,
(a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding fourteen years, where the subject-matter of the offence is a testamentary instrument or the value of the subject-matter of the offence exceeds five thousand dollars; or
(b) is guilty
(i) of an indictable offence and is liable to imprisonment for a term not exceeding two years, or
(ii) of an offence punishable on summary conviction,
where the value of the subject-matter of the offence does not exceed five thousand dollars.
Whether VW’s actions or the actions of its officers and directors could actually give rise to criminal liability in a Canadian context is purely speculative and beyond the scope of this article.
However, we do know that Canada’s Criminal Code includes “chief executive officers” in its definition of senior officers. Whether any senior officer would be held personally criminally liable would depend to a large extent on his or her actions, state of mind, and the ability of the evidence to prove the elements of the crime beyond a reasonable doubt. For example, some legal issues under a s. 380 fraud charge might include, but would not be limited to:
- Were consumers or car dealers defrauded when they purchased vehicles that secretly manipulated emissions outputs?
- Did the officer or director intend to defraud consumers or car dealers?
- Did the officer or director act to defraud consumers or car dealers?
- Did the officer or director direct an agent to defraud consumers or car dealers?
High-profile criminal prosecutions of corporations and their senior officers are rare in Canada. However, there are two more common methods of redress across every Canadian province: public prosecution under legislation and civil actions.
- Public prosecution under provincial or federal legislation
Although the Criminal Code is the primary federal rulebook for everyone in Canada, there are over 200 other provincial and federal statutes that specifically create liability for Canadian directors and officers. The penalties in that legislation range from light to severe. They may be referred to as “quasi-criminal” or “regulatory” proceedings, depending on how punitive the provisions may be.
For example, if the VW scandal had originated here, its senior officers might be concerned about potential prosecution by the Competition Bureau for misleading consumers contrary to the Competition Act, s. 52.1. The Competition Act deems as a party to the offence “any officer or director of the corporation who is in a position to influence the policies of the corporation in respect of conduct prohibited by this section.” A director or officer that meets that definition could face potential liability in such a case unless they exercised due diligence to prevent the commission of the offence. In other words, a Competition Act charge could turn (among other factors) on whether the officer took reasonable steps to prevent the impugned act from occurring.
Whether or not that would be the case with VW is unclear. Speculating on potential legal liability from all of Canada’s public statutes is beyond the scope of this article.
Similarly to criminal law, prosecution under provincial or federal statutes tend to be conducted by public authorities. What about actions by private individuals and organizations who were affected by the scandal? Under what civil laws would VW’s ex-CEO have faced potential liability in Canada if the scandal had originated here?
- Civil remedies
Canada’s civil legal system is separate from the criminal justice system. It is generally designed to resolve non-criminal disputes between private individuals. With the exception of Quebec, most provinces and territories in Canada follow the “common law” from the English tradition, which is a combination of judge-made law and legislation.
In Canada’s common law provinces there are many potential civil causes of action against directors and officers. Two particularly relevant sources of concern for officers and directors in situations like the VW scandal are the law of negligence and the fiduciary duty to act in their corporation’s best interests.
The law of negligence requires that we all meet the required standard of care when we have a duty of care towards other people. Directors and officers are no exception. Due to their level of responsibility, they may have a duty of care to the public, to their organization’s members, or to their corporation. A civil claim in negligence is possible (although would not necessarily be successful) when it could be proven on a balance of probabilities that the directors or officers of a corporation:
- had a duty of care;
- breached the standard of care; and
- caused damages by failing to meet the standard of care.
In addition to meeting the required standard of care to avoid negligence claims, directors and officers in Canadian corporations have to meet the standards set out in corporate legislation. For example, the Ontario Business Corporations Act (OBCA) places a fiduciary duty on officers and directors to “act honestly and in good faith with a view to the best interests of the corporation” and to “exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.” Claims under these OBCA provisions—or their federal counterparts in the Canada Business Corporations Act—are similar to negligence claims. Both rely on allegations that the directors or officers failed to take reasonable care to prevent harm to the public, shareholders, or creditors.
Again, it is beyond the scope of this article and uncertain whether VW’s ex-CEO’s actions would have attracted civil liability if the scandal had originated in Canada. Without all the facts, no one knows who or what entity may be liable (if at all) in a situation like VW’s. Whether any officer or director is at risk of liability depends on myriad factors and three very broad areas of law. Even so, the event is an important reminder that officers and directors of Canadian companies should be aware of the constellation of laws under which they may attract liability: criminal, legislative, and civil.
If you have any questions about the issues surveyed in this article, how they could affect you as a director or officer, or other legal questions, please contact the lawyers at Devry Smith Frank LLP at 416-449-1400.