The SCC Clarifies Unsettled Tort and Gives a Warning to Fiduciaries
In the recent case of AI Enterprises Ltd v Bram Enterprises Ltd, 2014 SCC 12, the Supreme Court of Canada clarifies the unsettled scope of the tort of unlawful interference with economic relations and warns fiduciaries of the dangers of acting in their own self interest.1
The Facts of the Case
The dispute related to a Moncton apartment building owned by four brothers through their respective companies.2 Three of the brothers wished to sell the building and one brother did not. Under an agreement that governed their affairs, the three brothers triggered an appraisal of the building. When the dissenting brother's company, A.I. Enterprises Ltd., failed to buy the building at its appraised value ($2.2 million) within the contractual time limit, the building was listed for sale.
Several potential purchasers expressed interest in acquiring the building, including one for $2.58 million and another for $2.5 million. These sales never closed. The plaintiffs alleged that the dissenting brother thwarted the sales through a series of intentional acts, including filing caveats on the building's title and impeding potential purchasers' access to the property. Ultimately, two years after the first attempts to sell, the dissenting brother's company bought the building for $2.2 million.
The other brothers (through their companies) sued the dissenting brother and his company for the difference between what a third-party purchaser would have paid and the amount for which the building was ultimately sold.
The main question for the Supreme Court was whether the dissenting brother and his company were liable for unlawfully interfering with the plaintiffs' economic interests.
Basic Elements of the Tort of Unlawful Interference with Economic Relations
The tort of unlawful interference with economic relations is committed when a defendant interferes with a plaintiff's economic interests by committing an unlawful act against a third party.3
The Court indicated that "[w]hile this tort is far from new, its scope is unsettled and needs clarification."4 In particular, the Court addressed what is needed to satisfy the elements of (1) unlawful means and (2) intention to inflict economic harm.
- What is Needed to Satisfy the Element of "Unlawful Means"?
The first question the Court addressed was what kind of conduct is needed to satisfy the element of "unlawful means". Writing for the unanimous Court, Justice Cromwell stated that the conduct complained of must give rise to a civil cause of action by the third party against the defendant or be such that the third party would have had a civil cause of action if it had suffered loss as a result of the conduct.
This narrow interpretation limits the nature of the conduct which can give rise to this tort. Consequently, "criminal offences and breaches of statute would not be per se actionable under the unlawful means tort, but the tort would be available if, under common law principles, those acts also give rise to a civil action by the third party and interfered with the plaintiff's economic activity."5
Put another way, conduct which might give rise to a criminal charge or regulatory offence against the defendant would only constitute "unlawful means" for the purposes of this tort if it could also form the basis of a civil cause of action by the third party affected by it, or would do so if that third party suffered damage as a result.
The Court's rationale for adopting this narrow approach was that "the common law generally prefers a limited role for the economic torts in the modern marketplace."6 This approach would, in the Court's view, avoid "tortifying" the criminal and regulatory law, which could result if civil liability were to be imposed where none would otherwise exist. The Court explained that this narrow scope is preferable given that it "provides certainty because it establishes a clear 'control mechanism' on liability in this area of the law, consistent with tort law's reticence to intrude too far into the realm of competitive economic activity."7
- What is Needed to Satisfy the Element of Intention to Inflict Economic Harm?
On the second question of what degree of intention to inflict economic harm a defendant must have, the Court held that the tort requires that the defendant must intend to harm the plaintiff, either as an end in itself, or as a means to an end. The Court explained that it is not sufficient that the economic harm to the claimant be merely incidental, as incidental economic harm is typically an accepted consequence of legitimate market competition.
- The Narrow Tort is Not Established in this Case
The Court concluded that on the facts of this case, the tort of unlawful interference with economic relations could not be established. This conclusion flowed from the "unlawful means" element, and that the conduct complained of was not the type which would give rise to civil liability to the third parties who were interested in purchasing the apartment. Consequently, liability for this tort, as narrowly formulated by the Court, could not be established.
Court Still Finds Liability on Other Grounds
Notwithstanding that the narrow tort was not established, the Court still found the defendants liable based on different grounds.
The dissenting brother, who had engaged in the obstructionist conduct, was also a director of the plaintiff companies. As such, he owed fiduciary duties to those companies. The Court held that he breached these fiduciary duties by failing to act in good faith in the interests of the companies. The Court cited numerous examples, including registration of improper encumbrances and impeding prospective purchasers' access to the building. As the trial judge put it, the dissenting brother "would in fact take whatever steps were necessary to prevent the sale of 99 Joyce to anyone other than himself".8
Consequently, the Supreme Court held the dissenting brother liable for breach of fiduciary duty and his company liable for knowing assistance in the breach of fiduciary duty and knowing receipt of the proceeds of the breach.
The Supreme Court of Canada has now clearly staked out the boundaries of the tort of unlawful interference with economic relations.
Although the Court elected to narrowly define the scope of this tort, it is still a potential cause of action that can apply in circumstances where a party's economic interests are being interfered with by another party's unlawful conduct toward a third party, which could give rise to potential civil liability of the defendant toward the third party.
Equally important, this case serves as a reminder to fiduciaries, such as directors and others that acting in improper self interest can itself lead to liability. Even if the tort of unlawful interference is not applicable, liability on other grounds, such as breach of fiduciary duty, knowing assistance of breach of fiduciary duty and knowing receipt of the proceeds of a breach of fiduciary duty can still be established.