Corporate Criminal Liability Discussion Paper 1999



TRADITIONAL THEORIES OF CORPORATE LIABILITY AT COMMON LAW

[8]  The criminal liability of corporations is widely recognized in the common law jurisdictions. How it is recognized, and its theoretical underpinnings, vary from one country to another, however. Two major theories have attracted attention in this regard.

Vicarious liability ("respondeat superior")


[9]  Under the doctrine of vicarious liability, a person may be bound to answer for the acts of another. Applied to corporations, the theory means that an organization may be liable for the acts of its employees, agents or mandataries, or any person for whom it is responsible. This doctrine, which was developed originally in the context of tortious liability, was imported with some hesitation into the criminal law, and especially its regulatory branch, when offences of this type were essentially absolute liability offences.5

[10]  The doctrine of vicarious liability is frequently criticized on the ground that it is contrary to the fundamental precepts of a justice system based on the punishment of individual fault to hold someone liable for the acts or omissions of his agents or employees. 6The theory seriously distorts the doctrine of mens rea, since a person's fault is automatically attributed to another person who has not himself committed any fault.

[11]  The doctrine may also prove to be excessively restrictive if a finding of liability in an employer requires the existence of a relationship of subordination between the corporate employer and the person who committed the offence. In the case of professional staff, representatives or agents of the corporation, the margin of autonomy may be cause to doubt the existence of a sufficient relationship of subordination. Furthermore, an employee or agent of the corporation who is not an employee within the strict meaning of the word must have acted in the course of his or her employment or assignment if the company is to be held liable. Yet it is not always obvious that breaches of the law are committed in the course of employment as it is strictly understood. 7

[12]  This theory, which is still applied by the U.S. federal courts, 8 has been discarded by the Canadian courts as a basis for corporate liability, at least in so far as mens rea offences are concerned. In the leading decision, Canadian Dredge, 9 the Supreme Court of Canada, after describing the difficulties, manifests a clear aversion for this theory and a preference for the so-called identity doctrine. Before introducing this latter doctrine, however, a comment is in order.

[13]  Vicarious liability is often contrasted with individual liability. In a context in which an individual's liability is at issue, this clear distinction between the two types of liability is completely understandable. In Min. of Employment and Immigration v. Bhatnager, 10 the Supreme Court clearly indicated that the application of the vicarious liability doctrine in criminal law is contrary to the principles of fundamental justice. However, the judgment explains that this doctrine, while proscribed by our law in the case of the criminal liability of individuals, is necessarily the basis for the legal reasoning underlying corporate liability. The personal liability of these collective entities necessarily implies some application of the doctrine of vicarious liability, since organizations can act only through the natural persons of whom they are composed. To that extent, corporate liability, whether based on the theory of "respondeat superior" or the identification theory, necessarily results from a rather broad application of the doctrine of vicarious liability. 11 In R. v. C.I.P. Inc., 12the Supreme Court frankly acknowledged this:

We must also remember that corporate criminal liability is essentially vicarious liability based upon the acts and omissions of individuals: "a corporation may only act through agents" (Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662, at p. 675).13

[14]  In this regard, possible Charter-based objections to applying this doctrine to natural persons must necessarily be considered from a different perspective when corporations are involved. And although the Supreme Court decisions clearly hold that corporations charged with an offence may rely on Charter arguments in challenging the constitutional validity of the charging provisions, 14 it is equally clear that the section 7 principles could be construed differently in a context in which only corporations are contemplated.

[15]  However, this is not to say that if the same provisions were enacted so as to apply exclusively to corporations, a corporation would be entitled to raise the Charter arguments which have been raised in the case at bar. The problem with ss. 36(1) and 37.3(2) of the Competition Act is that they are worded so as to encompass both individual and corporate accused. . . .15

[16]  In this context, it is unlikely, in our view, that a provision basing corporate liability on some application of the vicarious liability doctrine could effectively be challenged constitutionally.

Identification theory

[17]  For over a century, the English courts have based corporate liability on the so-called identification theory. Under this theory, there is an identity between the corporation and the persons who constitute its directing mind, that is, the individuals (officers or managerial level employees) whose duties within the firm are such that, in the course of their duties, they do not take orders or directives from a higher authority within the organization. The commission of an offence by a person or group of persons identified with the organization therefore constitutes an offence by the corporation as well. In this context, the criminal liability of the corporation, like that of natural persons, is primary and is not actually based on an application of the theory of vicarious liability.

[18]  In addition to the difficulty of defining exactly what the notion of directing mind encompasses, the major criticism of the identification theory, as restated in the English judgment Tesco Supermarkets Ltd. v. Natrass, 16 has to do with its limited application. 17 The limited number of individuals identified with the company substantially reduces the potential applicability of the criminal law, particularly in the context of large corporate entities in which the decision-making centres are fragmented and the persons closely identified with the corporation are seldom those performing the incriminating acts.18

[19]  In the leading decision, Canadian Dredge, 19 the Supreme Court of Canada adopted the identification theory as the basis for corporate criminal liability, but in a somewhat modified version that some have referred to as the delegation theory. Acknowledging the merits of the British theory, but aware of its limitations, Estey J., writing on behalf of a unanimous Court, expanded the circle of individuals who might attract liability in the company.

The identity doctrine merges the board of directors, the managing director, the superintendent, the manager or anyone else delegated by the board of directors to whom is delegated the governing executive authority of the corporation, and the conduct of any of the merged entities is thereby attributed to the corporation. 20

[20]  The Court further recognized that delegation and sub-delegation of authority from the corporate centre within different geographical entities does not bar the application of the identification doctrine.

[21]  In St. Lawrence, supra, and other authorities, a corporation may, by this means, have more than one directing mind. This must be particularly so in a country such as Canada where corporate operations are frequently geographically widespread. The transportation companies, for example, must of necessity operate by the delegation and subdelegation of authority from the corporate centre; by the division and subdivision of the corporate brain; and by decentralizing by delegation the guiding forces in the corporate undertaking. The application of the identification rule in Tesco, supra, may not accord with the realities of life in our country, however appropriate we may find to be the enunciation of the abstract principles of law there made. 21

[22]  The identity theory, as adopted by the Supreme Court as the basis for corporate liability, therefore steers a middle course between the extremely broad doctrine of vicarious liability and the identity doctrine recommended by the English courts. Only those employees of the company to whom powers pertaining to its management have been delegated may engage its liability. The notion of delegation is, however, broader than the concept adopted by the English decision, Tesco. To some degree, the criticisms that the identification theory is excessively restrictive are hereby answered, albeit not completely satisfactorily.

[23]  Some recent decisions illustrate that, even in its expanded conception, the identification theory has its limits. In Rhône (The) v. Peter A.B. Widener (The), 22 the issue was whether the captain of a vessel, who was liable for damage, could be considered a directing mind of the corporate owner of the vessel and engage the latter's liability. Writing on behalf of the majority, Iacobucci J. summarized as follows the parameters of the notion of directing mind:

As Estey J.'s reasons demonstrate, the focus of inquiry must be whether the impugned individual has been delegated the "governing executive authority" of the company within the scope of his or her authority. I interpret this to mean that one must determine whether the discretion conferred on an employee amounts to an express or implied delegation of executive authority to design and supervise the implementation of corporate policy rather than simply to carry out such policy. In other words, the courts must consider who has been left with the decision-making power in a relevant sphere of corporate activity.23 . . .

With respect, I think that the courts below overemphasized the significance of sub-delegation in this case. The key factor which distinguishes directing minds from normal employees is the capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis, whether at head office or across the sea.24

[24]  In view of this definition of the concept of directing mind, the navigational error of the lead tug captain, acting as master of flotilla, a captain to whom had been delegated significant responsibilities in relation to navigational operations, did not engage the liability of the company that employed him.

[25]  In a recent judgment, 25 the Ontario Court of Appeal, applying similar reasoning, acquitted a transportation company charged with filing a false shipping manifest covering hazardous wastes. The record indicated that the driver of the truck at the origin of the false manifest was the company's sole representative over an extensive geographical territory, and was the only one responsible for the collection of waste materials, the company's bookkeeping in the area and its relations with its customers. When this employee left, the company ceased its activities in the area.

[26]  There is no doubt that Mr. Howard had many responsibilities and was given wide discretion in the exercise of those responsibilities. It is equally clear that those, like Mr. Corcoran, who dealt with the appellant in the area, equated Mr. Howard with the appellant corporation. Neither of these facts establish the kind of governing executive authority which must exist before the identification theory will impose liability on the corporation. Mr. Howard had authority over matters arising out of the performance of the task he was employed to do. It was his job to collect and transport waste to its eventual destination in Breslau. His authority extended over all matters, like the preparation of necessary documentation, arising out of the performance of those functions. I find no evidence, however, that he had authority to devise or develop corporate policy or make corporate decisions which went beyond those arising out of the transfer and transportation of waste. In my opinion, Mr. Howard's position is much like that of the tugboat captain in The Rhône, supra. Both had extensive responsibilities and discretion, but neither had the power to design and supervise the implementation of corporate policy.26

[27]  These two cases show that the discussion on corporate liability is essentially centred on a case-by-case analysis to determine whether a particular employee, whose actions amount to an offence, may be characterized as a directing mind of the company. To the extent that the person who committed the wrongful act is not responsible for developing the company's policy, the latter is not liable. It is irrelevant that corporate expectations, defective corporate policies or insufficient supervision of the employee are the cause of the harm. The corporation is not criminally liable since the person who committed the wrongful acts does not have the authority to develop the corporate policies he is implementing.

[28]  It should be noted that the identification theory, as presented by the Court in Canadian Dredge, requires that the mens rea of the offence be that of the person who committed the unlawful conduct. As Estey J. comments, generally the directing mind is also guilty of the offence in question. 27 Although he declines to rule definitively on the issue of whether the guilt of the directing mind is a condition precedent to corporate guilt, 28 it is fairly clear that a corporation's liability is contingent on the liability of at least one individual.

[29]  Finally, it should be noted that the Court's judgment in Canadian Dredge discusses some defences that may be relied on by corporations. The fact that the actions of the directing mind were committed in disobedience of express instructions not to disobey the law is not a defence for the company. It would be too easy, says Estey J., to elude any criminal liability by adopting and disseminating general guidelines prohibiting any illegal conduct. Furthermore, the identification theory by definition bars any such defence since guidelines directed to other persons can have no effect on the company itself, as embodied by its directing mind. At most, he says, such guidelines can be a factor to be taken into consideration on sentencing. The only defence available to the company lies, rather, in the fact that the person who constitutes its directing mind acted wholly in fraud of the company, without the company deriving any benefit therefrom. In that case, it is hard to claim that the natural person still constitutes the ego of the company. Estey J. further recognizes that there is no community interest in punishing the company in such circumstances. 29 However, the fact that the acts of the company's directing mind were committed in fraud of the company cannot be relied on as a defence unless the company benefited to some degree from those acts.

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