On October 17, 2018, the lion's share of the federal Cannabis Act1 and the Ontario Cannabis Act, 20172 took legal effect, marking the legalization of non-medical cannabis across Canada, within defined limits. Directors and officers of federal and provincial corporations in the legal cannabis sector now operate in a new and dynamic regulatory climate.
As with any regulated industry, directors and officers should apprise themselves of the legal pitfalls in the post-legalization world, and liability insurers should prepare carefully for the potential risks that might shadow the cannabis market in its early days.
At a minimum, liability insurers should consider (a) new offences to which directors and officers are exposed, (b) what procedures are in place with respect to those offences, (c) what penalties might a director or officer be liable to pay, and (d) what defences are available, if any.
A director or officer's liability exposure under the federal Cannabis Act
Part 1 of the federal Cannabis Act enumerates several different prohibitions, obligations and offences, generally categorized as either criminal or "other". Since most, if not all, director and officer liability policies limit or omit coverage for criminal wrongdoing, insurers will likely take greater interest in the Act's prohibitions, obligations and offences categorized as "other".
These other prohibitions, obligations and offences apply to directors and officers as agents of the corporation. The federal Act specifies that "[a]ny director, officer or agent of a corporation who directed, authorized, assented to, acquiesced in or participated in the commission of an offence or violation is considered a party to the offence or violation, and is liable for the punishment provided for under the Act."3 These other offences include the following, amongst others:
- promoting cannabis, a cannabis accessory, or any service relating to cannabis subject to limited exceptions for those persons authorized to produce, sell or distribute cannabis;4
- promoting promote cannabis in a false, misleading or deceptive manner;5
- selling cannabis that has not been packaged or labelled in accordance with the regulations;6
- selling or displaying cannabis, or a cannabis accessory, in a manner that may result in the cannabis or cannabis accessory being seen by a young person;7
- selling cannabis to a young person (under 18 years of age);8 and
- obstructing by act or omission, an inspector who is engaged in the exercise of powers or the performance of duties or functions under this Act.9
Under the Act, the Minister10 designates certain individuals who are authorized to issue a "notice of violation."11 If the authorized individual believes on reasonable grounds that a person has committed a violation, the authorized individual may issue a notice of violation, which, amongst other things, identifies the alleged violation, the amount of the penalty, and particulars regarding the payment of the penalty.12
If served with a notice of violation, a director or officer has three options:
- Pay the penalty set out in the notice, in which case the director or officer is deemed to have committed the violation;
- If the penalty amount is more than CA$5,000, request to enter into a compliance agreement with the Minister in which the Minister ensures the director or officer's compliance with the impugned provision. If the director or officer selects this option, the director or officer is also deemed to have committed the violation; or
- Request a review by the Minister into the alleged violation or the amount of the penalty.13 The Minister is to consider only written evidence and written submissions in determining whether, on a balance of probabilities,14 a person has committed a violation, and whether the amount of the penalty was appropriately established.15
c) Liability exposure (penalties)
A director or officer who directed, authorized, assented to, acquiesced in or participated in the commission of one of the above prohibitions is liable to pay a penalty of not more than CA$1 million, or to pay a penalty of not more than the maximum amount fixed by the regulations.16
The federal Act, in certain circumstances does not provide directors or officers with a defence of due diligence—a common defence in which a director or officer can avoid liability by proving that he or she exercised "due diligence" or "reasonable care" in attempting to comply with the Act. On the contrary, the federal Act expressly states that such a defence is not available.17 It will be interesting to see how these defences are interpreted by the Courts when litigated.
This express statement appears to create an absolute liability regime, in which a director or officer named in the notice of violation cannot absolve his or herself of liability unless he or she can prove that the alleged violation is not true. If the Minister finds that the Act was violated, even if it was innocently violated, the director or officer is liable.
A director or officer's liability exposure under the Ontario Cannabis Act, 2017
The Ontario Cannabis Act, 201718 is a comparatively thin piece of legislation at only 28 provisions. As with the federal Act, the Ontario Cannabis Act, 2017 states that "[a] director or officer of a corporation who causes, authorizes, permits or participates in an offence under this Act by the corporation is guilty of an offence."19 The Act enumerates prohibitions under the heading, "Prohibitions Respecting Cannabis", including the following, amongst others:
- No person shall sell cannabis to a person under 19 years of age;20
- No person shall sell cannabis to a person who is or appears to be intoxicated;21
- No person shall purchase cannabis except from the Ontario cannabis retailer;22
- No person shall consume cannabis in a public place, a workplace, a vehicle or boat, or any prescribed place;23
- No person shall drive or have the care or control of a vehicle or boat, whether or not it is in motion, while any cannabis is contained in the vehicle or boat.24
The process for prosecuting and defending an alleged offence under the Cannabis Act, 2017 is less novel than the process under the federal Cannabis Act. In Ontario, the Provincial Offences Act,25 governs the procedure for statutory offences.
Under the Provincial Offences Act, a provincial offences officer can commence proceedings against a director or officer by issuing and serving a Certificate of Offence,26 or by laying an information (a prescribed form handed to a justice under oath, stating the alleged offence).27
Once a proceeding is commenced, the director or officer is entitled to procedural justice under the Provincial Offences Act up to and including a trial of the matter in the Ontario Court of Justice.
c) Liability exposure (penalties)
A corporation that commits an offence under the Act is subject to a maximum fine of CA$250,00028 unless the corporation (a) sells cannabis to someone under 19 years of age, in which case the maximum fine is CA$500,000,29 or (b) sells cannabis and is not a cannabis retailer, or allows its tenant to sell cannabis, even though the tenant is not a cannabis retailer, in which case the maximum fine is CA$1 million.30
As opposed to the federal Cannabis Act, Ontario's Cannabis Act, 2017 does not expressly exclude the defence of due diligence. Absent this express language, the common law presumes that each offence under the Cannabis Act, 2017 is a strict liability offence—meaning an offence to which the defence of due diligence applies.31
Consequently, for a director or officer to be found liable for an offence under Ontario's Cannabis Act, 2017, the prosecutor must prove, on a balance of probabilities, that the director or officer committed the act or omission, and failed to take all reasonable steps to avoid committing the offence.
The federal Cannabis Act exposes directors and officers to significant potential liability and does not allow for the defence of due diligence. Consequently, when assessing the risks of insuring a director or officer, insurers would be prudent to consider the degree to which a director or officer works in federally-regulated space, such as cannabis advertising, promotion and/or packaging. Insurers should also consider whether the director or officer's of the corporation have developed policies to ensure compliance with the federal Cannabis Act, and/or the corporation has agreed to indemnify directors or officers for breaches of the Cannabis Act.
The Ontario Cannabis Act, 2017 exposes directors and officers to comparatively less liability than the federal Cannabis Act, and allows for more robust defences. A director or officer is consequently will have more defences available under the Ontario Cannabis Act, 2017. Nevertheless, insurers will want to be mindful of corporate policies, which encourage compliance with the Cannabis Act, 2017. Since the procedure under the Provincial Offences Act is similar to that of a civil proceeding, the cost of defending a director or officer charged under Ontario's Cannabis Act, 2017 likely will be more expensive than defending a director or officer charged under the federal Act.
By understanding the new offences for which a director or officer is liable, the process for prosecuting these offences, the potential penalties, and the available defences, insurers can more accurately assess the risks of underwriting directors and officers at cannabis corporations.
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