Officers and directors are generally shielded from personal liability when doing business through corporations or limited liability companies. But that is not always the case. There are instances where officers and directors face personal liability despite doing business under a formal corporate structure. One such instance is where the officer is directly involved with construction work that is found to be defective. This limited exception to personal liability of officers and directors, despite doing business under a formal corporate structure, is known as the "personal participation doctrine".
The rationale behind the "personal participation doctime" is simple - officers and directors should not be shielded from their wrongful conduct causing personal injury or property damage to third parties under color of a corporation. But, "personal participation" requires a showing that the director or officer personally "directed, ordered, ratified, approved, consented or otherwise participated in" the wrongful conduct or tortious act. Once "personal participation" is established, the courts split over the form of wrongful conduct required to trigger personal liability for officers and directors of a corporation. Courts in Georgia and California, have held officers and directors "personally liable" for wrongful acts or active conduct as well as omissions or passive conduct giving rise to personal injury or property damage, including construction defects. But Courts in Delaware, limit "personal liability" for officers and directors to wrongful acts and exclude wrongful omissions or passive conduct from the "personal participation doctrine".
For example, the vice president of a corporate contractor was personally liable for construction defects under Georgia law based upon both passive and active negligence. In Jennings v. Smith, a Georgia Appellate Court held a corporate vice president personally liable for structural defects attributable to soils settlement under two circumstances. First, the officer has "passively negligent" when supervising his employees burying trash that caused the settlement and resulting structural defects. Second, the officer was also "actively negligent" when directing the trash to be buried beneath future structures and improvements. Either action resulted in the corporate officer being subject to personal liability for the resulting construction defects under a theory of negligent construction.
A similar result was applied to the president of a corporate subcontractor found personally liable for "active" and "passive" negligent" construction under California law. In Michaels v. Benavides, a California Appellate Court held a corporate president personally liable for drainage problems attributable to defective concrete placement. The court reasoned that the corporate officer "actively" participated in and directed construction of the defective work in violation of the standard of care and was aware of the defects. If the construction defects had been caused by employees failing to follow proper instructions and corporate policies, of which the president was not aware and did not participate, he would be shielded from personal liability for the resulting construction defects.
The president of a corporate contractor was found personally liable for construction defects under Delaware law based upon "active" negligence. In Washington Condo. Assoc. v Daystar, a trial court found a corporate president personally liable for the decision to use defective brick in repairing a building. The president "actively" participated in directing, ordering, approving, and consenting to the installation of defective brick causing the construction defect. However, the court found that the president would not be personally liable simply because he had knowledge of the defect and was simply "passively" negligent. Under Delaware law, a corporate officer must be actively negligent to be held personally liable for construction defects.
Corporate officers and directors may be subject to personal liability for wrongful conduct, including construction defects under two circumstances. One situation involves malfeasance where the C-Suite is "actively" negligent by directing, approving, or participating in the work giving rise to the construction defect. The other situation involves nonfeasance where the C-Suite is "passively" negligent and simply has contemporaneous knowledge of the construction defect. Both situations typically involve smaller closely held corporate contractors where the C-Suite is present in the field. However, personal liability could also attach to large corporate contractors in the unlikely event members of the C-Suite are present in the field, or participate in critical decisions when work results in construction defects.