Construction of a Dream Home Turned into a Nightmare: Personal Liability of Incorporated Contractor
We all dream of that perfect home, and being able to build it from the ground up is even more enticing. The ability to customize your living environment and make it “just right” for you seems like a dream come true. However, things do not always go according to plan.
That was the case in Zerbin v Vrbanek (2020 ABQB 797, aff’d 2021 ABCA 317), where David and Barbara Zerbin (the “Zerbins”) found out the hard way that building your dream home can easily become a nightmare. While this case involved many complex issues such as allegations of fraud, conspiracy, defamation, and breach of contract, the focus of this article will be on the issue of a finding of personal liability against an incorporated contractor.
The Zerbins hired DN Developments (“DN”) to provide construction management services for the build of their dream home and another smaller unit for their daughter. DN Developments provided its services through Darren Vrbanek, its sole principal, director, and shareholder. Under the contracts entered into by the parties, DN was the agent of the Zerbins for the purposes of obtaining quotes from third-party trades and suppliers, and it would charge its management fee as a percentage of the work performed or materials supplied. For the sake of expediency, the parties agreed that DN would handle all payments to suppliers and subcontractors on the Zerbins’ behalf, and in turn, invoice them monthly.
A few years into building their home, Mrs. Zerbin attended at the business of one of their suppliers in search of countertops. She met Daniel Tran, who advised her that Mr. Vrbanek “was ’engineering’ prices for personal gain”. Mr. Tran mentioned that Mr. Vrbanek asked him on multiple occasions to raise his initial quotes and coerced him into paying him a $35,000.00 kickback. Following this turn of events, Mrs. Zerbin had conversations with other subcontractors who also claimed that they were asked to increase their quotes. Moreover, they informed Mrs. Zerbin that there were significant amounts owing on services or materials supplied, despite the Zerbins having paid Vrbanek in full for such services and materials. The Zerbins ended their contractual relationship with DN and finalized their projects by themselves.
According to the Alberta Court of King's Bench’s finding, DN received an excess of $1,477,409 CDN plus an additional $39,001.41 USD for the two projects. At the time of the trial, DN had gone bankrupt, and the Zerbins contended that Mr. Vrbanek should be held personally liable based on fraud and the doctrine of lifting/piercing the corporate veil, among other things
The Court confirmed that in the civil context, fraud is commonly referred to as the tort of civil fraud or the tort of deceit, and the necessary elements to establish it are as follows:
- “a false representation made by the defendant;
- some level of knowledge of the falsehood of the representation on the part of the defendant (whether through knowledge or recklessness);
- the false representation caused the plaintiff to act; and
- the plaintiff's actions resulted in a loss.”
In a nutshell, the Court confirmed that civil fraud is “a false representation of fact, made with knowledge of its falsehood or recklessly, without belief in its truth, with the intention that it should be acted upon by the complaining party, and actually inducing that party to act upon it.”.
While the case law is uncertain on whether intent to deceive remains a necessary element of the tort of fraud, the Court confirmed that such intent can be “inferred through the evidence as a whole, including "a lack of evidence of a credible explanation of the concealment or false representation of the actor". Intent to injure a person, however, is irrelevant in the fraud inquiry.
As for the false representation component, the Court emphasized that it must be a representation of fact and not of future intention to defraud, and must include “express dishonesty, like deceitful or false statements, and the deliberate failure to disclose material facts”.
Lastly, when it comes to the required degree of knowledge, the Court clarified that it can be either actual knowledge of the falsity of the representation, or the defendant can be recklessly blind and choose to be indifferent to the truth of their statement.
In commenting on its ability to attach liability to Mr. Vrbanek personally, the Court noted that unlike cases involving negligence, it will more readily lift the corporate veil to find personal liability in cases involving intentional torts such as fraud or deceit. It offered the following guiding comments:
- “An individual director can be held personally liable for civil fraud without the necessity of piercing the corporate veil. In 1234389 Alberta Ltd v 606935 Alberta Ltd, 2020 ABQB 28, Kirker J found that "while there is some conflicting authority in relation to when directors and officers are personally liable for ordinary negligence, there is no such doubt when the facts invoke fraud, deceit or dishonesty" (1234389 Alberta Ltd at para 160).
- Finding a director personally liable for fraud is in alignment with the Business Corporations Act, RSA 2000, c B-9, s. 122, because "when a director and officer of a corporation acts in a fraudulent manner [...] that individual is no longer acting in the best interests of the corporation and is personally liable for their tortious actions": 1234389 Alberta Ltd at para 161.
- Kirker J further reasoned that "it does not offend the principle of corporate separateness to impose personal liability [...on a director for] fraudulent misrepresentation because her actions as the directing mind [...] exhibit a separate identity or interest from that of the [company] so as to make the act or conduct complained of her own": 1234389 Alberta Ltd at para 162.
- Similar reasoning has emerged from Ontario, where the Court in Mughal found that "directors are personally liable for their own tortious conduct at law, even if they claim to have been acting on behalf of a corporation": Mughal at para 45.”
On the issue of civil fraud, the Court concluded that the facts in this case point to a finding of fraud, deceit, and dishonesty on behalf of Mr. Vrbanek.
Piercing the Corporate Veil
The Court confirmed that an alternative way to find personal liability against Mr. Vrbanek was to pierce the corporate veil. It outlined the necessary elements of the test to lift the corporate veil:
- “The individual exercises complete control of finances, policy, and business practices of the company.
- That control must have been used by the individual to commit a fraud or wrong that would unjustly deprive a claimant of his or her rights.
- The misconduct must be the reason for the third party's injury or loss: Transamerica at para 24.”
The Alberta Court of King's Bench concluded that this was an appropriate case to pierce the corporate veil and find Mr. Vrbanek personally liable. The Alberta Court of King's Bench’s conclusion was based on its previous findings that Mr. Vrbanek’s conduct was deceitful and fraudulent, such conduct was a direct cause of the Zerbins’ loss, and Mr. Vrbanek exercised complete control over DN at all times.
The Alberta Court of King's Bench’s decision was appealed to the Alberta Court of Appeal, which ultimately upheld the lower court’s finding of fraud and piercing the corporate veil. The Alberta Court of Appeal commented on the fact that the lower court’s analysis on lifting the corporate veil was an unnecessary step, as fraud was already proven, leading directly to a finding of personal liability:
“ While the trial judge did not err in this regard, we are of the view that it was unnecessary for him to even proceed to this next step and consider whether to pierce the corporate veil. The factual overlap between the fraud finding and the conclusion to pierce the corporate veil rendered this secondary analysis largely redundant. The finding of fraud would attract liability to Mr Vrbanek in any event. The record before us obviates the need to determine whether these are indeed distinct paths to personal liability.”
This decision provides valuable guidance to both contractors and homeowners.
For contractors, the case illustrates that one cannot always use their corporation to shield themselves from personal liability, particularly in instances of fraudulent conduct. It is crucial that a contractor always remain honest and transparent in all dealings with both clients and subcontractors. As seen in Zerbin, liability can arise not only from making incorrect statements, but also from failing to disclose material facts
As for homeowners, prevention is always better than cure. Homeowners who are considering building their own dream home should closely monitor the evolution of the project and the expenses associated with it. Requesting weekly or monthly reconciliation statements from the general contractor or being involved in negotiation discussions with trades and suppliers is always advisable.