Duty of Care and the Business Judgement Rule as a Defence

Written by Ivana Palacios

UCalgary Law | JD Candidate 2024

There are many duties to which the directors and officers of a company are subject. It is unlikely that the average businessperson is aware of all of them. While this may be of initial concern for a new director or officer, there is good news. There are factors working in favour of directors and officers in Canada. Significantly, one of them is the defense of the Business Judgement Rule.[1]

The Duty of Care is one of the fiduciary duties that are owe by directors and officers, the Business Judgement Rule (BJR) provides a defense when this Duty is called into question. In 2004, in what has become known as the People's case[2], the Supreme Court of Canada officially adopted the BJR. This meant that the courts should give deference to business decisions due to the risk of hindsight bias when considering a decision made in the past. The BJR has three key elements:

Reasonable business decisions based on circumstance,

The court will focus on form of decision not the substance,

Perfection is not required.[3]

In practice this means that courts will not consider alternative decisions that are often developed in hindsight. The Directors or Officers only need to show that their decision was reasonable in the given circumstances. This has been shown to include both substantive and procedural elements.[4] The court will pay attention to whether there is evidence that the board understood the issue and will look at evidence that they analyzed the issue. The courts will consider whether data the board considered and whether the amount of time was appropriate. Additionally they will consider whether retaining independent advisors required if it was done they will consider whether the board engaged with the advisors or passively followed their advice. Ultimately, the court will determine whether the process met the standard of reasonability and from there generally the decision will be justifiable.

The standard by which a board, director, or officer's decision will be examined is whether it was made prudently and on a reasonably informed basis.[5] The BJR helps directors and officers' defended decisions made when they are call in to question in hindsight. There are many duties that directors and officers owe and this is only one of the factors working in favour of Directors and Officers in Canada.

[1] Bryce Tingle, Start-Up and Growth Companies in Canada, 3rd ed (Canada: LexisNexis, 2018) at 192.

[2] Peoples Department Stores Inc. (Trustee of) v Wise, [2004] SCR 461, 2004 SCC 68.

[3] Ibid., at para 67.

[4] Supra note 1 at 193.

[5] Supra note 4.