The American doctrine of successor liability has long been the source of fear for the parties to an asset purchase agreement.
The doctrine provides that a purchaser corporation, which has acquired the assets of another company but not its shares, may be held responsible for the liabilities of the seller corporation. This can occur even where those liabilities were expressly not assumed in the acquisition.
Most liabilities on successor corporations are statutorily imposed. They require the successor company to pay out wages or engage in environmental remediation as a result of the predecessor’s conduct.
However, at common law, the doctrine can also hold the successor company liable for contractual breaches or the tortious actions of the seller company.
In Canada, the doctrine is shrouded with mystery.
The Alberta Court of Queen’s Bench effectively declared it dead in a 2016 decision, Cooperative Centrale v. Liebig 2016 ABQB 417.
By contrast, in 2018, the Ontario Superior Court in Talbot v. Nourse, 2018 ONSC 1061, may have resurrected the doctrine. The Court held that “[t]he theory has been accepted as potentially applicable in Canada”.
The status of successor liability at Canadian common law is accordingly ripe for appellate review.
Why the Resistance?
Successor liability has never been fully resolved in Canada.
Unlike in the United States, where cases such as Ramirez v. Amsted Industries Inc., 431 A. 2d 11 (Sup. Ct., 1981), have firmly grounded the doctrine in American jurisprudence, Canadian Courts have only ever entertained the doctrine in the context of preliminary motions.
In these Canadian decisions, the defendant successor corporations have brought motions to remove themselves as parties to civil actions on the basis that they were never involved in the tortious conduct of their predecessor or were never parties to the contract which the seller executed.
On these motions, Canadian Courts have largely rejected the application of successor liability.
There are principled reasons for doing so.
Citing Wayne D. Gray’s leading article on the issue, “The Case Against Adopting a General Doctrine of Successor Liability”, 53 CanBusLJ 116 (HeinOnline), the Alberta Queen’s Bench in Liebig declined to apply the doctrine in a negligence action against the successor defendant accounting firm which had purchased the assets (and not the liabilities) of its predecessor. The successor had no involvement in the underlying matters giving rise to the action.
In reaching the conclusion that the defendant successor could not be held liable for its predecessor’s negligence, the Court reiterated Gray’s policy reasons for not applying successor liability in Canada. Among them:
- As a matter of fairness and efficiency, corporate purchasers “acquire ownership of a specific set of assets for a fixed price, all or part of which may include the assumption of defined liabilities”. The buyer usually does not “assume the residual liabilities of the business—in large part because [they] are difficult for the buyer to accurately quantify”; and
- Successor liability is inconsistent with the doctrine of privity of contract, which provides that only the parties to the contract, and not their successors, can be held liable for a breach.
Because the successor accounting firm in Liebig did not acquire the liabilities of its predecessor under the asset purchase agreement, there was no good reason to impose successor liability.
The Court held that the doctrine simply has no application in Alberta, or in Canada generally.
The Revival of Successor Liability in Ontario?
Despite the Court’s declaration on successor liability in Liebig, the Ontario Superior Court in 2018 appears to have taken an entirely different approach in the Talbot decision.
Talbot involved an effort by the plaintiff to hold the defendant successor corporation liable under a promissory note entered into between the plaintiff and the defendant’s corporate predecessor. Through a series of transactions, the successor had ultimately acquired the predecessor’s assets after the promissory notes were entered into.
The Superior Court declined to apply successor liability in this case. It held that while most cases of successor liability involved attempts to impose tortious liability on the successor defendant, the plaintiff was seeking to use the doctrine to impose contractual liability on the successor defendant instead.
The Court noted that there were fundamental differences between negligence and contract cases which justified not applying the doctrine to matters of contract:
In negligence cases, the injured party has little, if any, control over the circumstances giving rise to the harm. In commercial cases, the situation is different. There are a number of steps a party can take to protect itself against defalcation on a promissory note that are not available to a plaintiff in a negligence claim. In addition, there are a number of corporate law principles that might apply to extend liability to [the successor]. These might include the Bulk Sales Act…oppression, piercing the corporate veil and unjust enrichment…
Despite having declined to apply successor liability, the Court in Talbot did hold that the theory “has been accepted as potentially applicable in Canada”. Notably, the Court made no reference to the Alberta Liebig decision in its endorsement.
The Need for Appellate Review
The decisions above illustrate a genuine debate at Canadian common law about the wisdom of adopting successor liability in Canada.
While the Alberta Queen’s Bench has declared the doctrine dead, Ontario arguably still recognizes its potential application, albeit in the context of tort actions only.
These inconsistencies must be resolved by an appellate Court.
Absent a definitive pronouncement by a higher Court in Canada, plaintiffs will continue to seek damages for tortious conduct and contractual breaches from successor corporations that may have had no involvement in the underlying dispute and that never agreed to assume such liabilities.
At the same time, successor corporations will be forced to bring preliminary motions to dismiss the actions against them, with varying and inconsistent results throughout the country.