Understanding A Director’s Duty of Care
“The duty of care means that a director has to attend the meetings of the board and its committees which he is a member of, prepare for such meetings, inquire about the legal person, its activities and its market, supervise the management of the legal person and provide a positive and active contribution to the best of his knowledge and competence. Corporate directors of Canadian private or public companies owe a duty of care to the corporation they are a part of per the Canada Business Corporation Act.
A director must be well informed, proactive and have the courage to act. The courage to act means that he must not hesitate to express his actual thoughts and propose what appears to him to have to be done in the best interest of the corporation, even if this may displease management or colleagues or affect his own personal ambitions and interests.”
Case Study
The Supreme Court of Canada interpreted the duty of diligence as follows in the Peoples Case1 :
| “[67] Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.” |
When the board delegates part of its duties to a committee or to management, it must ensure that such delegation is made to competent persons who, according to the reasonable judgment of the board, will themselves act with care and loyalty.
In the context of legal recourse, various circumstances and elements may be taken into consideration by the courts in determining whether reasonable care was exercised by the legal person and its directors in the circumstances. Let us mention some elements which have been considered by the courts according to the circumstances:
- the nature and seriousness of the harm;
- the investigation and detection systems implemented, and more generally, the risks management system (assessment and treatment);
- the quality of the verifications made on a regular and on a one-time basis;
- the culture of the enterprise;
- the policies adopted by the enterprise in the relevant area and the follow-up on these policies;
- the training and assistance provided to employees respecting the prevention of the type of risk which materialized;
- the foreseeability of the loss, problem or event;
- the prior knowledge of the problem or indications of a potential problem;
- the time it took to react and the measures taken to rectify the problem once it is known;
- the record or history of the enterprise in that respect;
- the degree of tolerance to risk or past breaches;
- the availability of measures to prevent harm or reduce the impact thereof;
- the competence of the responsible persons.
1Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68.” Source Lavery.ca
A breach of a director’s duty of care is a common allegation in directors litigation and is the type of claim that the typical directors and officers insurance policy would cover for defence costs and any resulting settlements or damages awarded subject to the specific terms and conditions of the policy.
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