The Latest on Punitive Damages in Wrongful Dismissal Cases

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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.

Ontario Franchise Legislation – Tough Times for Franchisors

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As any Ontario franchisor will tell you, the last few years have not been a walk in the park for owners of franchise systems. The current legislation in Ontario, known as the Arthur Wishart Act (Franchise Disclosure), 2000, has very strict rules about the type of disclosure that a franchisor (one who grants a franchise) must make to a perspective franchisee (one who is granted a franchise).  While that is fair and understandable, the Act also contains provisions which impose a significant penalty or disadvantage on a franchisor for even the most technical violation.

As an example, if the disclosure material contains the slightest deficiency, a franchisee can operate its business for up to two years before deciding whether or not to terminate the franchise agreement.

If the franchisee decides to terminate on that basis, it is entitled to receive back from the franchisor all of the money paid to the franchisor for the franchise rights including any money paid for equipment purchased for use in the business. Obviously, that equipment has to be returned.

The recent case of 2189205 Ontario Inc. v. Springdale Pizza Depot Limited deals with the question of the franchisor’s obligation to re-purchase equipment when the equipment itself is in poor condition.

In this case, the franchisor was ordered to pay compensation to the franchisee in a substantial amount for certain supplies and equipment payable upon the return of that equipment.

The franchisee had kept almost all of these items in storage in a barn in rural Ontario since 2009. It was now prepared to deliver this material to the franchisor in exchange for payment.

The franchisor argued that the franchisee was “unable” to return the supplies and equipment because of their poor condition given that they had been in storage for almost five years. The franchisor argued that the poor condition was at least partially as a result of what it alleged was improper removal and storage by the franchisee.

The Court ruled in favour of the franchisee. It determined that under the legislation, equipment has to be repurchased regardless of its condition. The Court considered that the legislation is remedial in nature and contains no duty on a franchisee to mitigate its damages. As a franchisee is entitled to be made whole, and as there was no evidence in this case of any deliberate acts of damage to the equipment by the franchisee, it was entitled to repayment of the entire purchase price. Its condition was irrelevant.

The legislation is indeed remedial in nature. It came into force as a result of an enormous amount of abuse heaped on unwitting and vulnerable franchisees by unscrupulous franchisors. However, cases like this must make one wonder as to whether or not the legislation simply goes too far.

The Latest from the Supreme Court of Canada on Summary Judgments

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On January 23, 2014, the Supreme Court of Canada released its reasons in Hryniak v. Mauldin.  The case continues the current trend of lowering the bar on the test for summary judgments.

The Court made a number of observations about the fact that most people cannot afford to take matters to trial, the importance of ensuring access to justice for all Canadians, and the fact that such access must be provided in a timely way.  Accordingly, according to the Court, “summary judgment rules must be interpreted broadly favouring proportionality and fair access to the affordable, timely and just adjudication of claims.”

The Court went on to suggest that even in its current interpretation of Rule 20 of the Rules of Civil Procedure, the Ontario Court of Appeal has set the bar too high.

To summarize, until not very long ago, summary judgments were generally reserved to cases which were absolutely clear cut, and in which there were no credibility issues to be resolved.  Any case that involved questions of credibility had to go to trial so that live witnesses could testify and judges could decide who to believe.

The rule on summary judgments was subsequently amended and its interpretation broadened by the Court of Appeal.  As a result, motion judges were empowered to make findings of credibility and issue summary judgments where they were satisfied that they had a “full appreciation” of the facts and the issues.  In such cases, they could make those decisions without putting the parties to the expense and delay involved in conducting a trial.

The Supreme Court of Canada now seems to be suggesting that motion judges can make these decisions without necessarily having the full appreciation of the facts.  The Court has to govern itself on the basis of proportionality and “the proportionality principle means that the best form for resolving a dispute is not always that with the most pain staking procedure”.  If the process is disproportionate to the nature of the case, there will not be a fair and just result.

Accordingly, judges are to make findings of fact unless it is in the interest of justice that the matter go to trial.  If the judge feels that he or she can “fairly and justly adjudicate a claim”, it will generally be deemed appropriate for him to do so and not against the interest of justice for this to be done.  If a party insists that oral evidence must be obtained in order for there to be a fair and just adjudication, that party now has the obligation to demonstrate why this is true.

In other words, the onus has shifted completely.  It is no longer necessary for a party seeking a summary judgment to show that oral evidence is not necessary.  Rather, the responding party must now demonstrate why oral evidence is necessary.

In my view, this is a fundamental shift in approach.  The Supreme Court of Canada seems to be saying that to the extent possible, the days of protracted and expensive litigation are over, to the extent possible.

The Latest on Driving with a Cell Phone

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Ontario is one jurisdiction with legislation prohibiting people from driving while using a cell phone.  While the legislation appears clear, some ambiguity may have developed concerning the precise limits of the prohibition.  That ambiguity has now been resolved by the recent Ontario Court of Appeal case of Her Majesty the Queen v. Kazemi.

In that case, the accused was driving home from work alone.  While stopped at a stop light, a policeman saw her with her cell phone in her hand.  The evidence before the Court was that the cell phone had been on the seat but that it had dropped to the floor of the car while she was driving.  When she got to the red light, she picked it up and that is when the policeman saw her.

The legislation prohibits people from driving “while holding or using a hand-held wireless communication device…”.  The issue was whether or not the accused was “holding” the cell phone for the purposes of this section.

At trial, the judge determined that her admission that she had the cell phone in her hand was sufficient to merit a conviction.

She appealed to the Ontario Court of Justice.  The appeal judge dismissed the charge.  He found that there would have to be some sort of sustained physical holding of the phone in order to meet this requirement and that the momentary handling that took place in this case was not sufficient.

The Crown appealed to the Court of Appeal.  The Court of Appeal restored the conviction after considering the current law on statutory interpretation and the Oxford dictionary definition of “to hold”.  The Court determined that the interpretation of “holding” best ensuring the attainment of the legislation’s objective, which is to protect people using Ontario’s roads, simply involves having a grip on a phone without any reference to the amount of time involved.

The Court also quoted the Minister of Transportation describing the purpose of the legislation this way in a speech in Parliament:

Our eyes-on-the-road, hands-on-the-wheel legislation aims to stop the use of hand-held wireless communication devices such as cellphones while driving.  The goal is not to inconvenience people but to make our roads safer for them and for everyone else who shares our roads.  For safety’s sake, drivers should focus on one thing and one thing only: driving.

So there you have it.  If you are driving and you are seen by a policeman with a cell phone in your hand, regardless of the circumstances or the length of time that you hold it, you are guilty of an offence.  This is because Parliament has determined that drivers must focus on one thing and one thing only, namely driving.  Speaking for myself I will certainly keep this in mind the next time I pass a drive-thru window at a quick service restaurant and drive away, as the law allows me to do, with a sandwich in one hand and a cup of coffee in the other.

The Latest on the Duty of Good Faith Between Contracting Parties

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The recent case of Ashbury Cleaners v. Crisolago Holdings may make the murky world of the law concerning the duty of good faith between contracting parties even murkier.

In this case, the Judge described the action as a claim “for damages for breach of contract and bad faith.”  The Judge went on to say that “in order to be successful, the plaintiff must prove on the balance of probabilities that the defendant was acting in bad faith in deceiving the plaintiff of its stated intention.”

The law is very clear: there is no independent duty of good faith upon which one can sue for breach.  Parties are obliged to act in good faith towards each other in the implementation of a contract but one cannot sue for damages for bad faith.  There is a distinction, and this case is very close to the line.

The plaintiff worked part-time at a dry cleaning business owned and operated by the defendant.  The plaintiff offered to buy the dry cleaning business from the defendant and the parties agreed to a purchase price of $250,000.  Since the defendant owned the premises in which the business was located, they also agreed on a lease for the use of the premises for five years at $4,000 per month in rent.  The lease included a right of first refusal for the plaintiff to lease the premises again after the end of the five-year term, exercisable if the defendant decides at that time to continue to lease the premises out.  It was expressed this way because the defendant wanted the freedom to take the premises back after the five-year term to operate it himself.

At the end of the five-year term, the parties discussed a renewal.  While the evidence of the parties differed with respect to their discussions, it appears that at the very least the defendant indicated that if the plaintiff wanted to lease the premises for a further term, the rent would be $4,500 per month. The plaintiff indicated that she could not afford to pay that much and asked the defendant whether or not he would be interested in buying the business back. The defendant expressed such an interest and offered the plaintiff $35,000 on a take it or leave it basis. She took it.

Several days later, another individual passed by the store and bumped into the defendant.  This person knew the defendant because her employer had been a tenant at the premises several years before.  The defendant asked this individual if she wanted to buy the dry cleaning business.  She expressed interest and ultimately they agreed on a sale of the business for $225,000.  A lease with the purchaser was entered into for a five-year term at $4,500 per month to start, increasing to almost $5,500 in the final year of the lease.

The plaintiff then sued, insisting that the defendant had deceived her into giving up her right of first refusal.  The plaintiff advanced the theory that the defendant had the new buyer (and new tenant) in mind all along and persuaded the plaintiff to walk away from the business and the lease for very little compensation so that the business could be flipped at a significant profit.

The trial Judge found in favour of the defendant.  The Judge was satisfied that there was no evidence that the defendant had intended anything other than to take the premises back and operate the business himself until, by coincidence, he bumped into a person who turned out to be a new purchaser and new tenant.  There was no evidence of premeditation.

The problem I have is the trial Judge’s suggestion that the defendant would have been liable for damages if the plaintiff had been able to prove that the defendant had “breached the duty of good faith it owed to the plaintiff as its bargaining partner and deceived [the plaintiff] into signing away her rights under the lease.”  In my view, even if the defendant had deprived the plaintiff of her right of first refusal by misleading her about his intentions, the fact is that the new lease entered into with the new purchaser provided for rental amounts which the plaintiff had clearly indicated that she simply could not afford.  In other words, even had the plaintiff been told that the defendant had an opportunity to lease the space to someone else at $4,500 per month to start, increasing annually thereafter, the plaintiff would never have been able to match that offer.  For that reason alone, in my view, there is some considerable doubt whether or not the plaintiff was deprived of her rights.  In those circumstances, there is no question that the plaintiff would have been mistreated.  However, shabby treatment does not amount to a cause of action in and of itself.

The Cruel World of Insurance Policies

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In the recent case of Certain Underwriters at Lloyd’s of London v All Spec Home Inspections and Mario Lucciola, the Court considered the availability of insurance coverage to a home inspector who missed a critical electrical problem on a home inspection resulting in a contractor’s death. At the very end of the decision, the Judge made reference to the “cruel world of claims-made-and-reported policies of insurance.” While colourful language of this nature is not unusual for the particular Judge in this case, it is not language that one sees very often.  Nevertheless, the facts of this case show how appropriate they are.

Mr. Lucciola, a self-employed home inspector, conducted an inspection of a property in St. Catharines in July 2010.  At the time, Mr. Lucciola had professional liability insurance on the basis of a one-year term renewed annually through to 2011.

Mr. Lucciola produced a report and photographs, making no reference whatsoever to any electrical problems.

On August 16, 2010, a contractor was doing work in the attic of the property.  He came into contact with an exposed energized bare copper wire.  He was electrocuted and he died.

Three days later, on August 19, 2010, Mr. Lucciola signed an application for professional liability insurance as he had done every year since 2006.  His insurance application required him to indicate whether or not any claim had been made against him in the last five years, and whether or not he was aware of any situation or circumstance which may result in a claim in the future.  Mr. Lucciola answered “no” to both questions.

The policy was then issued for a further period of one year.

Several days later, Mr. Lucciola was interviewed by an investigator for the Ministry of Labour, at which time he was asked whether or not he had noticed the wire in the attic. He indicated first that he had not noticed it and subsequently that he had but that he had tested it with an electrical tester and received no response from it.  For that reason, he had not made any note of it in his report.

About a year later, the Ministry of Labour conducted an inquest.  Subsequently, Mr. Lucciola signed yet another application for insurance.  It contained the same questions and he answered them in the same way.  Accordingly, a policy was issued for a further one year.

All of these policies contained language to the effect that if the insurer subsequently became aware that if any of these questions had been answered incorrectly, there would be no coverage for any claim or action emanating from a fact or circumstance that the applicant failed to mention in his application.

A lawsuit was subsequently brought against Mr. Lucciola.  He notified his insurer of the claim.  The insurer brought this application for an order that it had no obligation to provide insurance coverage.

The Court had little difficulty concluding that Mr. Lucciola should have known of the potential claim against him when he made his application for the insurance policy that was in effect at the time that he was sued, and should have answered “yes” to that question on his application.  As a result, the Court ruled that the insurer was entitled to deny coverage.

The interesting point in this case has to do with the type of insurance policy that was in place.  Mr. Lucciola’s policy was a “claims-made-and-reported” insurance policy, rather than an occurrence policy.  These are very different.  In a claims-made-and-reported policy, it is the transmittal to the insurer of notice of the claim that invokes coverage.  In an occurrence policy, coverage goes into effect when the incident upon which the claim is based actually takes place.

In this case, the incident (the contractor’s death) took place in August 2010.  The policy in place at that time had been applied for by Mr. Lucciola in 2009.  In 2009, when he answered “no” to the questions as to whether or not he was aware of a possible claim, he was being entirely accurate.  Had his policy been an occurrence policy, the insurer would have had to provide coverage.

In this case, however, the policy in place when coverage was invoked was the policy in effect at the time that Mr. Lucciola notified his insurer of the claim.  In applying for that policy, Mr. Lucciola had answered “no” to questions that should have been answered “yes”.  For that reason alone, Mr. Lucciola was disentitled to coverage.

This is obviously a critical distinction.  If you have professional liability insurance coverage, and you are not aware of the type of policy that protects you, this case is a good lesson on the importance of finding that out and keeping it in mind.