Question

BUSINESS OF LAW-CANADA

What is identification theory and how does it assist the courts to impose criminal and tort liability in the case of corporate wrongdoing?

Identify and briefly explain the factors that a court must consider when setting fines or imposing other penalties on a corporation found to be responsible for the commission of a criminal offence.

Answer 1

What is identification theory and how does it assist the courts to impose criminal and tort liability in the case of corporate wrongdoing?

In the field of corporate/business law, one encounters the identification theory/doctrine whilst looking into corporate liability. Corporate liability defines the degree to which a corporation as a legitimate entity can be held accountable for the transgressions of its employees. Such laws are important to keep a check on corporations so that they do not fill their coffers on the back of illegal activities. These laws also hold corporations & their senior employees responsible for the actions they take.

The watershed moment in the case of corporate criminal law in Canada, is the 1985 case of Canadian Dredge and Dock Co. v. The Queen. In this ruling, the Supreme Court accepted the identification theory/doctrine as the basis for holding a corporation liable. As per this theory, crimes committed by senior employees (the directing minds of the organization) hold the company liable as it merges the individual and the corporate so as to hold the latter liable for transgressions.

As a company functions through its employees, the identification theory holds that the minds of those calling the shots in a corporation are the minds of the corporation itself. In Canada this theory is adapted from the one in the United Kingdom. However, the Canadian law prescribes a case-by-case study in order to determine whether the employee in question is part of the directing minds in the corporation or not.
In order to determine the directing minds, the Canadian Supreme Court in 1993 clarified that directing minds are different from ‘normal’ employees as they have the ability to “exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis.” The directing minds include— "the board of directors, the managing director, the superintendent, the manager or anyone else delegated by the board of directors to who is delegated the governing executive authority of the corporation".

The Canadian law has laid out that the identification theory along with corporate criminal liability shall be triggered when “the actions of the employee (who must generally be liable himself), the actor-employee who physically committed the offence must be the "ego", the "center" of the corporate personality, the "vital organ" of the body corporate, the "alter ego" of the corporation or its "directing mind". The law along with the ruling for case-by-case referral has helped the courts to sanction corporations whose directing minds have indulged in wrong doings.

There are however, some criticisms of the identification theory which say that it is simplistic, limited and constricted. This is because only when transgressions are committed by the directing minds, can the corporation be held liable. There is no mention of acts by lower level employees.

Identify and briefly explain the factors that a court must consider when setting fines or imposing other penalties on a corporation found to be responsible for the commission of a criminal offence.

Under the law established by court, before setting fines or imposing other penalties, it must be verified and proved that the crime in question was committed by a directing mind or senior officer in the corporation. If this is not so, then the corporation cannot be held liable for actions of an individual employee. If the crime is committed by a directing mind, it also needs to be adjudged whether the individual did so on his own behalf against the policies of the corporation or was the corporation aware.

In the landmark of Canadian Dredge and Dock Co. v. The Queen case, the Supreme Court laid out three conditions which state that the identification theory/doctrine works where the Crown demonstrates that the action taken by the directing mind—

(A) Was within the field of operation assigned to him;

(B) Was not totally in fraud of the corporation; and

(C) Was by design or result partly for the benefit of the company.

These factors have to be kept in mind as well while judging such a case. Some other factors that need to be kept in mind while setting fines and imposing penalties are:

1. What benefit (if any) did the corporation get due the transgression by its directive minds.
2. The court also has to work out the complexity, the duration of time till which the offence was being committed and what planning had gone into carrying out the offence. The severity of the sanctions would depend on the amount of planning, complexity and duration.
3. It is also checked whether the corporation tried to hide or convert its assets so as to avoid paying the fines for wrongdoings on grounds of financial incapability.
4. While court commits itself to remedying a wrong doing, it also keeps in mind the impact a sentence would have on the economic viability of the corporation and the jobs of its employees.
5. There is also a factor to keep in mind the cost incurred by the authorities for the investigation and prosecution of the offence.
6. It is also checked whether the corporation or its directing minds are repeat offenders i.e. whether they were convicted or sanctioned for a similar offence in the past.
7. The compensations paid by the corporation to the complainant are also kept in mind.
8. The court also looks over whether the corporation has taken any action or established measures to ensure that such transgressions do not occur in the future.