The recent decision of the Court of Appeal in Greenaway vs Sovran brings forward an interesting point about the enforceability of a restrictive covenant in a partnership agreement involving only two partners.

In this case, the parties were partners with each other in an accounting practice that operated for over 20 years. They carried on practice in two separate locations, each partner working out of a different city in Ontario. There were no other partners.  The partnership agreement was poorly drafted, having been prepared without legal advice by one of the parties based on a precedent that he had obtained at a conference in the United   States (I pause to note that in my experience, this type of thing happens with alarming frequency – even among professionals).

The agreement contained a covenant providing that where a party withdraws from the partnership, that party will suffer a reduction in his capital account by 500% of the average fees billed by the firm to clients who transfer their files to him within the following 24 months. The Court characterized this as a “restrictive covenant”.

In this case, Greenaway gave notice to Sovran that Greenaway would be retiring from the partnership.  He subsequently provided a further notice confirming that he was retiring from the firm, and giving notice of his intention to dissolve the partnership as of the date of his retirement.

The date came and went.  Both parties continued to provide accounting services to what were essentially former clients of their partnership.

Sovran took the position that Greenaway was subject to the restrictive covenant, so that his capital account now reduced by $1 million given the number of clients who transferred their files to him after the dissolution of the firm. Greenaway took the opposite position and the matter was dealt with by way of Application.

Greenaway took the position that the dissolution of the partnership prevented Sovran from trying to enforce any covenant against him. Sovran responded by pointing to a clause in the agreement stating that the “interest of the firm should take precedence over the interest of an individual,” suggesting that this meant that there was in contemplation a continuing business entity following the departure of a partner which would be entitled to the protections contained in the restrictive language in the agreement.  The Application judge found that Greenaway had indeed withdrawn from the partnership triggering the clause in the agreement that reduced his capital account.

The Court of Appeal disagreed. As far as the Court of Appeal was concerned, the agreement between the parties was intended to apply to multiparty partnerships and not a partnership of two. Greenaway’s withdrawal coincided with the dissolution of this two-member firm at which point, according to the Court of Appeal, the firm ceased to exist and the parties were free to pursue their own practices without any reduction in Greenaway’s capital account. There was no contractual term preventing them from doing so and if either had wished to include a specific term permitting one partner to prohibit the other from competing, which could have been done. In the absence of such a provision, the Court felt that it was reasonable to conclude that the partners should be limited to their common law and statutory rights in the event of dissolution and nothing more. Otherwise, an unhappy partner would have to choose between remaining handcuffed to the other partner or quitting the partnership and, for practical purposes, leaving the entire business to the other partner.

This is an important case for partnerships involving no more than two partners. It demonstrates the care that must be taken in drafting any provisions in an agreement intended to govern the relationship between the parties if the partnership is dissolved. If proper care is not taken, the parties run the risk that upon the dissolution of the partnership, covenants of a restrictive nature contained in their agreement may be unenforceable.

The recent decision of the Ontario Court of Appeal in The Estate of Pate v. The Corporation of the Township of Galway-Cavendish and Harvey provides interesting insights into the current state of the law on awards of punitive damages in wrongful dismissal cases.  The rather tragic facts of the case also provide useful guidance to employers inclined to take a heavy-handed approach with terminated employees.

Pate was employed as a building inspector for the defendant Township for almost 10 years until March 1999 when he was fired. The Township claimed that it had uncovered discrepancies regarding building permit fees for which Pate was responsible.  Pate was never provided with particulars of these allegations, but the chief building official told Pate that if Pate resigned, the Township would not contact the police.  Pate refused to resign.

After the termination, the chief building official turned some information over to the police.  The investigating officers were reluctant to lay charges but the Township exerted pressure on the higher-ups in the police organization and charges were laid.  Pate had to go through a four-day criminal trial before being acquitted in 2002.  He then sued for damages for wrongful dismissal and malicious prosecution and requested punitive damages.

Unfortunately for Pate, the criminal proceedings were the subject of considerable media coverage.  According to the Court, he remained in the public spotlight from the date of his dismissal in 1999 until his acquittal in 2002.  He never obtained another job in the municipal field again and he died in 2011.

The question as to whether or not Pate had been wrongfully dismissed was never really an issue.  The Township acknowledged its liability for this early on and paid Pate damages equivalent to 12 months’ pay based on a negotiated agreement.  The interesting aspect of the case had to do with the claim for punitive damages.

Punitive damages have always been available in both tort and contract cases in Ontario.  Historically, however, they have been very difficult to obtain.  The tests employed by the Court have included words such as “malicious” and “high handed”.  Historically, such damages have rarely been awarded in straight business disputes.  They seem to be awarded much more frequently in two types of cases: claims against insurance companies and wrongful dismissal cases.

An award of punitive damages is unlike any other type of award.  Other awards are intended to compensate an injured party for losses suffered because of the wrongful conduct of the defendant.  Punitive damages do not involve any aspect of compensation.  Instead, they are meant to punish the wrongdoer for behaviour of which the Court strongly disapproves.  In the words used in the jurisprudence, the objectives of awards of punitive damages are “retribution, deterrence, and denunciation”.

This means that the amount to be awarded for punitive damages, if any, is conditioned on two factors.  The first factor, of course, involves the question of just how bad the defendant’s conduct actually was.  The second factor has to do with the defendant’s financial means.  After all, if the point of the award is to deter a party from repeating this type of conduct, an award of $100,000 may be very meaningful (and have a high deterrent value) to a middle class individual but completely meaningless to a major multi-national corporation.  In the latter case, a much larger award may be appropriate.

In this case, the conduct of the Township went well beyond its urging the police to take action.  The Court also found that the Township had uncovered evidence in the course of its own investigation that was in Pate’s favour.  The Township deliberately refrained from sharing that information with the police.  That fact demonstrated the type of malice that justified not only an award of punitive damages but also an award of damages for malicious prosecution.

At the trial level, Pate was awarded punitive damages of $25,000.  Pate appealed to the Court of Appeal, arguing that this figure was too low.  The Court of Appeal sent the case back to the trial judge for a new trial on the issue.  After the re-trial, the trial judge increased the award of punitive damages from $25,000 to $550,000.  The Township then appealed that decision.

On appeal before three Court of Appeal judges, one of the judges saw nothing wrong with the new figure.  The other two judges disagreed, although not significantly, and reduced the award to $450,000.

While there has always been a wide range of punitive damages in wrongful dismissal cases, there has been a low average award of about $25,000 in most cases although some have exceeded that by a considerable amount.  In other cases of breach of contract, misrepresentation or other such torts, the average has been about $50,000.  In cases involving the denial of insurance claims, much higher amounts have been awarded; in one case that was ultimately decided by the Supreme Court of Canada, $1 million was awarded.

In this case, considering the blameworthiness of the misconduct, Pate’s vulnerability, the harm caused to him, the total amounts awarded to him and the warrant for punishment, the Court had no difficulty determining that the award should be towards the high end of the spectrum.

Employers are typically in the driver’s seat in these matters.  Employees tend to be vulnerable and there are many employers who cling to the idea that they can act with impunity in terminating employment.  While it is true that as a general principle, subject to the existence of an employment agreement, an employer can terminate employment at will (provided that the employer provides reasonable notice or pay in lieu of notice), that does not mean that an employer can behave in an outrageous manner.  Employers failing to appreciate this may well find themselves on the wrong end of a substantial punitive damages award.