Gimme Shelter (Staying Behind the Corporate Veil)
Incorporating your construction business has many clear advantages, one of which is personal liability protection under the “corporate veil”. The so-called corporate veil refers to the shelter one receives in their personal capacity when their company is being sued; essentially, they are shielded from personal liability. There are exceptions to the corporate veil, and certain requirements that need to be followed to take advantage of this legal protection. One of these requirements is the need for businesspersons to identify the name of the company with which they are associated, and its status as a corporation. In the Saskatchewan case of Hill v. Kronberg, a court ruled that a contractor (the “Contractor”) was personally liable for deficient workmanship because he did not inform a homeowner (the “Homeowner”) that his business, Common Sense Renovations Inc. (“Common Sense Inc.”) was incorporated.
The Homeowner required restoration and renovation work to be done in her home. Upon the recommendation of a third party, the Homeowner hired the Contractor for this work. In all of her dealings with the Contractor, the Homeowner claimed that she was unaware that the Contractor was operating as an incorporated business. Dissatisfied with his work, the Homeowner sued the Contractor in his personal capacity for deficient workmanship. At trial, the Contractor argued that he should not be held personally liable because it should have been clear to the Homeowner that he was operating under a corporate entity (i.e. Common Sense Inc.).
Ultimately, the Court found the work of the Contractor to be deficient, and disagreed with him regarding personal liability. While the Contractor used his trade name, “Common Sense Renovations”, in emails and invoices to the Homeowner, the trade name and style did not contain an “Incorporated” or “Inc.” indicator. The Court ruled that the Homeowner should not be presumed, in the absence of evidence to the contrary, to know that she was dealing with a distinct corporate entity. There is a clear legislative requirement in British Columbia, under the Business Corporations Act, for a corporation to use its full name in all contracts, invoices and orders for goods or services made on behalf of the corporation. The inclusion of “Inc.” or “Ltd.” is important, and while its absence will not automatically create personally liability, in some circumstances it can. The court in this case ruled that the Contractor did not provide the Homeowner with a clear indication that she was dealing with a corporate entity, and he was subsequently unable to seek the protection of the corporate veil. The Contractor was found personally liable for the deficient workmanship.
1. When operating an incorporated business, always include in your business name the words “incorporated” or “limited” or the interchangeable abbreviations “Inc.” or “Ltd.”, whichever matches your business designation.
2. Include your full company name on business correspondence and invoices. Even if you use a different trade name, be sure to let clients, businesses, and other entities know that you are incorporated.
3. If your business is not incorporated and you would like to know more about the benefits of incorporation and the corporate veil, ask your lawyer for more information.
This article was written by Jay N. Spiro, a lawyer, and John A. Wiebe, an articled student, who practice in construction law with the law firm of Kuhn LLP. This article is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have any questions or comments about this case or other construction law matters, please contact us at 604-864-8877 (Abbotsford) or 604-684-8668 (Vancouver).