Canada: Corporate Director Incarcerated For 30 Days For Ignoring Arbitration Awards

Originally published in the Employment and Labour Relations Bulletin November 2005

When Mr. Ladislav Nagy ("Mr. Nagy") started his hotel enterprise, his business plans likely did not include the United Food and Commercial Workers ("UFCW").

That became quite apparent after his employees organized and certified the UFCW as their bargaining agent. Although Mr. Nagy signed a first collective agreement with the UFCW in early December 2004 in his capacity as President, General Manager and Secretary of 777604 Ontario Limited, which operated under the business name Rainy Lake Hotel, the business failed to comply with many of its financial obligations.

Specifically, Rainy Lake Hotel failed to remit union dues and initiation reports and to contribute to the UFCW’s National Defence Fund and health and dental plans as required under the terms of the parties’ collective agreement. As a result, over time, the UFCW lodged three separate grievances against Rainy Lake Hotel, which resulted in three separate arbitrators issuing awards against the hotel ordering it to pay the UFCW all outstanding remittances and ordering it comply with the collective agreement ("Awards").

Though Rainy Lake Hotel and specifically its owner, Mr. Nagy, attended and participated at each grievance hearing, Rainy Lake Hotel simply ignored the Awards and continued failing to pay various outstanding and accruing amounts owing to the UFCW.

Consequently, in an effort to force compliance with the Awards and its collective agreement, the UFCW filed the Awards with the Ontario Superior Court of Justice and sought an order from the Court declaring Rainy Lake Hotel (including the operating business, 777604 Ontario Limited) and Mr. Nagy in contempt of court. The UFCW asked that a fine be imposed and that Mr. Nagy be imprisoned. It should be noted that under the Labour Relations Act, 1995, arbitration awards may be filed with the Court and once they are filed, they have the same force and effect as a court order.

In response to the Union’s Motion for Contempt, Mr. Nagy took the simple position that his business could not pay the outstanding sums, alleged that the company was on precarious financial ground and that it "might fold". He blamed the "oppressive financial consequences" of the collective agreement he had signed with the UFCW.

As to the order sought against him personally, Mr. Nagy took the position that he could not possibly be in breach of contract as he was not personally a party to the collective agreement with the UFCW or a party to the Awards.

Unfortunately for Mr. Nagy, Ontario’s Rules of Civil Procedure contemplate that where a corporation is held in contempt of court, an order for contempt may equally be issued against officers and/or directors of the corporation who were aware of the orders defied. Rainy Lake Hotel was clearly in contempt of the Awards, which by virtue of their filing with the Court, were treated as court orders. Because Mr. Nagy was clearly aware of the Awards (and thus court orders) and given his position as President, General Manager and Secretary of the business, the Court concluded that Mr. Nagy had in fact aided and abetted the business in its contempt. Citing Supreme Court of Canada jurisprudence, the Court ruled that anyone who aids and abets another in defying a court order may also be held in contempt.

In the end, though Mr. Nagy had no direct contractual relationship with the UFCW and arguably had not committed any positive act in defiance of the terms of the Awards and court orders, the Court nonetheless held him responsible and in contempt. In support of its decision, the Court went on to rule "there is a duty imposed on all directors of corporations to do everything that is reasonable to ensure compliance with a court order." As the directing mind of Rainy Lake Hotel, the Court held that Mr. Nagy was responsible for ensuring compliance with the Awards and that he had clearly failed to do so.

Therefore, amongst other things, on September 16, 2005 the Court issued a warrant for Mr. Nagy’s arrest and a term of imprisonment of 30 days. In addition, contributing further to Mr. Nagy’s and Rainy Lake Hotel’s financial troubles, the Court ordered 777604 Ontario Limited and Mr. Nagy to jointly and severally pay a fine of $25,000.00 plus an additional payment of $15,000.00 towards the UFCW’s legal costs.

Clearly, this was not in Mr. Nagy’s business plans when he ventured out in the hotel business, nor likely something he ever contemplated when he ignored the Awards issued under Rainy Lake Hotel’s collective agreement with the UFCW. We would venture to guess that Hank Williams Jr.’s "There’s A Tear in My Beer" and Roy Orbison’s "Cryin’ in My Beer" now serves as background music while Mr. Nagy drains his woes at his establishment.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2005 McMillan Binch Mendelsohn LLP

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