Co-Lenders’ Personal Liability for Agent’s Misrepresentation #326

By Gerry Neely
B.A. LL.B.

Raising financing for a specific project occasionally involves pooling the funds of a number of investors in a mortgage in favour of a limited company which is incorporated and managed by the persons who brought the project to the attention of the investors. An arrangement of this kind is often structured through order forms and powers of attorneys, agreements between co-lenders and between the co-lenders and the company as trustee (in this column to be referred to as the manager).

Investors might be surprised to discover that they may have incurred a greater risk than not recovering their investments: personal liability for damages resulting from the conduct of the manager. This was the issue in an action brought by a glazing contractor for approximately $500,000 owed to it. The glazier contracted for and did the work only after an officer of the manager had advised the contractor’s banker that the money to pay the contractor was in place. In fact, virtually all money had been paid out and there was no arrangement in place for conventional financing. On these facts, liability for the negligent misrepresentation of the officer was imposed upon the officer, the manager and the co-lenders.

The potential for liability of the co-lenders depended upon the extent of their control over the manager. A person can be both an agent and a trustee at the same time. The distinction between them is that an agent acts for and under the control of his principal, while a trustee ordinarily is not subject to the control of a beneficiary. Beneficiaries are not personally liable if the person is merely the trustee. The greater the power of control over the agent/trustee, the greater the principles of agency rather than trust are applicable.

In this case the trustee acknowledged that it acted as the agents of the co-lenders, who had a number of rights to exercise control, including whether the trustee should take action because of default. The extent of control was sufficient for the judge to hold that the co-lenders, as principals, were liable for the negligent misrepresentations of the officer.

There must have been sufficient equity in the property to cover the damages because the contractor’s lawyer recommended that payment of the damages in priority to repayment to the investors, should be limited to their interest in the mortgage.¹

In an Ontario case, a shell company without assets repudiated a binding contract to purchase property for $2,000,000 when the real estate marker collapsed. The principal of the shell company was held to be liable for damages of $870,000 upon the same agency principles because the shell company was clearly the agent of the principal.²

	1.	Advanced Glazing Systems Ltd. v. Frydenlund, Multimetro Mortgage Corp. et al Reasons for Judgment, May 25, 2000, SCBC, Nanaimo.
	2.	642947 Ontario Ltd. v. Fleischer, 1997(9) RPR (3d) 262.

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