Fiduciary Duty

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Author: Sarah Nadon - Law Student
Edited By: Ryan Carson

A fiduciary duty is the obligation of one party to act in the best interest of another party. These types of relations arise all over. They can include corporate relationships and patient-doctor relationships. In 2004, the Supreme Court of Canada released an important decision in regards to the meaning behind section 122(1)(b) of the Canada Business Corporations Act (CBCA) in regard to fiduciary duties.

In 1992, Wise Stores Inc, which was owned by the three Wise brothers acquired Peoples Department store. The Wise brothers became the only directors, and sole shareholders of Peoples. Due to covenants imposed at the time of purchase, in order to rationalize the operations of the two similar companies, the Wise brothers adopted a joint inventory procurement policy where Peoples bought all its merchandise from north American suppliers while Wise Stores bought its merchandise from oversees. The stores went through hardship and by 1995, both companies declared bankruptcy. People’s creditors filed a petition against the Wise brothers claiming that they favoured the interest of the Wise stores over Peoples in breach of their duties under section 122(1) of the CBCA. Subsection 122(1) of the CBCA establishes two distinct duties:

122. (1) Every director and officer of a corporation in exercising their powers and discharging their duties shall:

  • (a) act honestly and in good faith with a view to the best interests of the corporation; and

  • (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

In the case at bar, it was determined by the Court that the Wise brothers did not breach their statutory fiduciary duty owed to the corporation and that the duty was owed to the corporation and not to the creditors. The decision to allocate the inventory in the way that the Wise brothers did, was not a situation where the directors benefited or put themselves in a conflict of interest.

Director’s won’t be held in breach of duty of care under section 122(1)(b) of the CBCA if they act prudently and on a reasonable informed basis. In the case at bar, the implementation of a new business policy was a business decision attempting to correct serious financial troubles, there was no indication of dishonesty or fraud.

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