A fiduciary duty is a legal duty where one person (the “fiduciary”) has to act in the best interests of another (the “beneficiary”). Trust lies at the heart of the fiduciary relationship. The beneficiary trusts that the fiduciary will act in good faith. Fiduciary relationships are everywhere: lawyers have a fiduciary duty to their clients; doctors to their patients; parents to their children; even spiritual advisors can be fiduciaries.
One common example of a fiduciary relationship is that of a company’s director to the company. Business Corporations Acts across the country all indicate that a director of a company has to act in the best interests of the company. When a director fails to do so (i.e. when a director breaches his or her fiduciary duty), the company’s stakeholders can seek special remedies to protect their interests. In WestCorp Solutions Ltd v Lancaster, 2018 BCSC 789, the British Columbia Supreme Court reminds us that it’s not just the directors who may be found liable for this breach of fiduciary duty. A stranger to the fiduciary relationship (i.e. someone outside the director-company relationship) may also have to pay up.
Mr. Collins and Mr. Scherzer set up WestCorp Solutions to seek consulting opportunities in Alberta’s oil and gas industry. When the relationship between them soured, Mr. Collins set up another company, PSE, with Mr. Lancaster to go after a consulting contract (“the Nexen contract”) that WestCorp had been pursuing. PSE succeeded and WestCorp lost the Nexen contract.
There was no doubt that Mr. Collins, a WestCorp director, owed a fiduciary duty to WestCorp. There was also no doubt that he breached that duty when he and PSE went after and acquired the Nexen contract and when he actively concealed his involvement in PSE from WestCorp and Mr. Scherzer. Mr. Collins and WestCorp agreed to settle their dispute, so Mr. Collins’s liability for the breach wasn’t at issue in this case. Instead, the court asked whether Mr. Lancaster, a stranger to Mr. Collins’s fiduciary relationship with WestCorp, could also be found liable for Mr. Collins’s breach.
The answer was yes and the Court relied on a four-part test from Air Canada v M & L Travel Ltd,  3 SCR 787, to reach its conclusion. The first two parts were clearly met: Mr. Collins owed WestCorp a fiduciary duty and he breached that duty fraudulently and dishonestly. The last two parts are about what Mr. Lancaster knew and did regarding Mr. Collins’s breach. The Court cited a wealth of facts to substantiate these two parts:
- Lancaster worked with Mr. Collins to keep PSE a secret from WestCorp
- Lancaster hid his and Mr. Collins’s involvement in PSE by appointing a dummy director
- Lancaster actively misled Mr. Scherzer one day after incorporating PSE
- Lancaster backdated share transfers when he realized Mr. Collins had a conflict
Having found that Mr. Lancaster assisted in the breach of Mr. Collins’s fiduciary duty to WestCorp, the Court then had to determine what it would order Mr. Lancaster to pay by way of a remedy. The Nexen contract with PSE was supposed to last 21 months. However, after only 9 months, the contract between Nexen and PSE was terminated. WestCorp claimed that had it been awarded the contract, it would have carried the contract for the full 21 months. So, WestCorp based its claim for damages on the idea that the loss it suffered was actually greater than the profits PSE made.
In order to calculate the revenue that WestCorp could have earned, the Court took the actual revenue earned by PSE for the first nine months of the contract (less expenses) and then extrapolated the average monthly revenue over the final twelve months of the contract. For the first nine months, this equaled $501,107. For the subsequent twelve months, the Court decided to reduce the extrapolated amount by 25% because those estimated profits were more speculative. Essentially, the Court reduced the amount by 25% because it’s hard to say with absolute certainty that WestCorp would have carried the contract for the full term. The Court wanted to account for realistic possibilities that could have prevented the business opportunity from being fully realized. After the 25% reduction, WestCorp’s profits were estimated at $444,512. Taken with the lost profits for the first nine months, this equaled an award of damages of $945,619. Mr. Collins had already paid WestCorp $450,000 in settlement, so Mr. Lancaster and PSE were ordered to pay the remaining $495,619 plus interest.
The moral of this story is that simply because you aren’t in a fiduciary relationship doesn’t mean you won’t be held liable if you assist the actual fiduciary in breaching his or her duty. The courts will typically take a hard line toward fiduciaries who breach their duties. In this case, a stranger to a fiduciary relationship was found liable for just under half a million dollars for knowing of the fiduciary duty and for actively participating in the breach.
This article was written with the assistance of Alison Colpitts, Articled Student.