Building a Dream Home Turned into a Nightmare: The Incorporated Contractor’s Personal Liability – Construction and Planning
We all dream of that perfect home, and being able to build it from scratch is even more appealing. The ability to customize your living environment and make it “just” for you seems like a dream come true. However, things don’t always go as planned.
This was the case in Zerbin vs. Vrbanek (2020 ABQB 797, confirmed 2021 ABCA 317), where David and Barbara Zerbin (the “Zerbins“) found out the hard way that building his dream home can easily become a nightmare. Although this case involves many complex issues such as allegations of fraud, conspiracy, defamation and breach of contract, this article will focus on the issue of a statement of personal liability against an incorporated contractor.
The Zerbins have hired DN Developments (“DN“) to provide construction management services for the construction of their dream home and another smaller unit for their daughter. DN Developments provided its services through Darren Vrbanek, its sole director, administrator Under the contracts entered into by the parties, DN was Zerbins’ agent for purposes of obtaining quotes from third-party companies and vendors, and would charge its management fees as a percentage of work performed or materials manage all payments to vendors and contractors on behalf of Zerbins and in turn invoice them monthly.
A few years into the construction of their home, Mrs. Zerbin went to one of their suppliers’ business looking for countertops. She met Daniel Tran, who informed her that Mr. Vrbanek “was ‘engineering’ awards for his personal gain”. Mr. Tran mentioned that Mr. Vrbanek repeatedly asked him to increase his initial quotes and coerced him into paying him a bribe of $35,000.00. Following this turn of events, Ms Zerbin had conversations with other contractors who also claimed they had been asked to raise their quotes. In addition, they informed Ms. Zerbin that there were substantial sums due on services or materials provided, although the Zerbins had paid Vrbanek in full for these services and materials. The Zerbins ended their contractual relationship with DN and finalized their projects on their own.
According to the decision of the Court of Queen’s Bench of Alberta, DN received a surplus of C$1,477,409 plus an additional US$39,001.41 for the two projects. At the time of the trial, DN had gone bankrupt and the Zerbins argued 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 deception, and the elements necessary to establish this are:
- “a false statement made by the defendant;
- some level of knowledge of the falsity of the representation on the part of the defendant (whether knowingly or recklessly);
- the misrepresentation caused the plaintiff to act; and
- plaintiff’s actions resulted in a loss.”
In short, the Court confirmed that civil fraud is “a misrepresentation of a fact, made with knowledge of its falsity or recklessly, without believing in its veracity, with the intention that it be put into practice by the complaining party, and effectively inducing that party to act accordingly.”.
Although the case law is unclear whether intent to deceive remains a necessary element of the tort of fraud, the Court confirmed that such intent can be “inferred from all the evidence, including “the absence of evidence of a credible explanation for the cover-up or misrepresentation of the actor”. The intent to injure a person is, however, not relevant in the investigation of fraud.
As for the element of misrepresentation, the Court emphasized that it must be a representation of fact and not a future intent to defraud, and must include “express dishonesty, such as misleading or false statements , and willful omission to disclose material facts”.
Finally, with respect to the degree of knowledge required, the Court clarified that it may be either actual knowledge of the falsity of the representation, or the fact that the defendant may be recklessly blind and choose to be indifferent to the veracity of his statement.
Commenting on its ability to attach liability personally to Mr. Vrbanek, the Court noted that unlike negligence cases, it will more easily lift the corporate veil to determine personal liability in cases involving intentional torts such as fraud or deception. He offered the following guiding comments:
- “An individual director can be held personally liable for civil fraud without the need to pierce the corporate veil. there is conflicting authority as to when directors and officers are personally liable for ordinary negligence, there is no doubt when the facts plead fraud, deceit or dishonesty” (1234389 Alberta Ltd at para 160).
- Finding that a director is personally liable for fraud is in accordance with the Companies Act, RSA 2000, c B-9, s. 122, because “when a director and officer of a company acts fraudulently […] that person is no longer acting in the best interest of the company and is personally liable for his tortious actions”: 1234389 Alberta Ltd at para 161.
- Kirker J further opined that “it does not violate the principle of separate business to impose personal liability
[…on a director for] fraudulent misrepresentation because his actions as the directing mind […] present an identity or an interest distinct from that of the [company] in such a way as to appropriate the act or conduct complained of”; 1234389 Alberta Ltd at para 162.
- Similar reasoning emerged from Ontario, where the Court in Mughal held that “directors are personally liable for their own tortious conduct at law, even if they claim to have acted on behalf of a corporation”: Mughal at para 45.
On the issue of civil fraud, the Court found that the facts in this case pointed to a finding of fraud, deceit and dishonesty on the part of Mr. Vrbanek.
Pierce the Corporate Veil
The Court confirmed that another way to determine Mr. Vrbanek’s personal liability was to pierce the corporate veil. He described the necessary elements of the test to lift the corporate veil:
- “The individual exercises complete control over the finances, policies and business practices of the company.
- This control must have been used by the individual to commit fraud or wrong that would unjustly deprive an applicant of his or her rights.
- The misconduct must be the cause of the injury or loss of the third party: Transamericaat para 24.”
The Alberta Court of Queen’s Bench found that this was an appropriate case to pierce the corporate veil and find Mr. Vrbanek personally liable. The finding of the Alberta Court of Queen’s Bench was based on its previous findings that Mr. Vrbanek’s conduct was deceptive and fraudulent, such conduct was a direct cause of the loss of the Zerbins, and Mr. Vrbanek exercised full control over DN at all times.
The Alberta Court of Queen’s Bench 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 that the lower court’s analysis of the lifting of the corporate veil was an unnecessary step, as fraud was already proven, leading directly to a finding of personal liability:
“ Although the trial judge did not err in this regard, we are of the view that it was not even necessary for him to take the next step and consider whether he should lift the corporate veil. The factual overlap between the finding of fraud and the conclusion to lift the corporate veil made this secondary analysis largely redundant. The finding of fraud would in any event engage Mr. Vrbanek’s liability. The record before us obviates the need to determine whether these are indeed separate avenues to personal liability.”
Take away food
This decision provides valuable advice to contractors and owners.
For entrepreneurs, the case illustrates that one cannot always use their company to protect themselves from personal liability, particularly in cases of fraudulent conduct. It is essential that a contractor always remain honest and transparent in all their dealings with customers and subcontractors. As seen in Zerbinliability may arise not only from misrepresentations, but also from the non-disclosure of material facts
As for the owners, prevention is better than cure. Homeowners considering building their own dream home need to keep a close eye on the progress of the project and the associated expenses. It is always advisable to request weekly or monthly reconciliation statements from the general contractor or engage in negotiation discussions with trades and suppliers.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.