Kosmopoulos v. Constitution Insurance Co. of Canada
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| Kosmopoulos v. Constitution Insurance Co. of Canada | |||||||||
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| Hearing: November 1, 6, 1985 Judgment: January 29, 1987 |
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Chief Justice: Brian Dickson |
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Majority by: Wilson J. |
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Kosmopoulos v. Constitution Insurance Co. of Canada [1987] 1 S.C.R. 2 is a leading Supreme Court of Canada decision on the court's ability to pierce the corporate veil. That is, impose liability upon the owners of a company instead of the company itself. It was held that the veil can only be lifted where it would be "just and equitable".
The case is also a leading source of insurance law. The insurer refused to indemnify Mr. Kosmopoulos on the grounds that the corporation owned the property, and that even though he was the sole-shareholder of the corporation. The insurers position was consistent with the 1925 decision of the House of Lords in Macaura v. Northern Assurance.
Although the SCC rejected the plaintiffs corporate veil argument, and a his bailee argument, the court did over-rule the Macaura rule. The ratio of this case is that an insured may recover an indemnity so long as they meet the factual expectancy test, regardless of whether they have bare legal title to the subject matter of the insurance contract.
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[edit] Background
Mr. Kosmopoulos had a leather goods company for which he was the sole shareholder and director. His lease for the company office was under his own name from when he originally ran the business as a sole proprietor. His insurance agency knew that he was under the lease and himself but carried on business as a corporation. A fire in a neighbouring lot damaged his office, however, the insurance company refused to cover his damages.
Under the common law, as established by Salomon v. Salomon, corporations are entirely separate entities from those who run it, and thus contracts made by the company cannot apply to anyone but the company itself.
[Business corporations are purely a creature of statute; there is no common law basis for the proposition that a corporation is a separate legal entity from that of its shareholder (that is, this paragraph questions part of the veracity of the preceding paragraph). Although Salomon v. Salomon is often cited as a reference for that proposition, the decision in Salomon v. Salomon was based on the clear language of the statute under which the corporation at issue was created, namely the U.K. Companies Act, 1862. Nevertheless, although it is based solely on statute, business corporations are in fact separate legal entities: for example, §15(1) of the Canada Business Corporations Act states that "[a] corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person."]
At trial the judge held that Mr. Kosmopoulos could not recover damages as they were owned by the company and not him. This ruling was upheld on appeal.
The issue before the Court was whether the assets of Mr. Kosmopoulos, as shareholder, were covered by the insurance.
[edit] Reasons of the Court
The Court upheld the ruling of the lower courts. Stating that this was not a situation where the courts can "lift the corporate veil".
To reach this conclusion the Court examined the requirements to "lift the veil". Wilson J. explained:
- The law on when a court may disregard this principle by “lifting the corporate veil” and regarding the company as a mere “agent” or a “puppet” of its controlling shareholder or a parent corporation follows no consistent principle. The best that can be said is that the “separate entities” principle is not enforced when it would yield a result “too flagrantly opposed to justice, convenience or the interest of the Revenue"…Courts have the power, indeed the duty, to look behind the corporate structure and to ignore it if it is being used for fraudulent or improper purposes or as a “puppet” to the detriment of a third party.
From this, Wilson held that the test for lifting the veil is that it must be "just and equitable".
