Canada: Kickbacks: Recovering Ill-Gotten Gains

Last Updated: June 7 2018
Article by Theodore Fong

Introduction

Key employees are crucial to the success of any organization. They are the top performers and the faces of the company - entrusted with authority and autonomy to execute their duties. Inherent in any such relationship is trust.

M-I Drilling Fluids Canada, Inc v Cottle, 2018 ABQB 143 concerns a key employee who broke this trust, profiteering for several years from kickbacks while the employer paid inflated prices for supplies. When the fraud was discovered, the employee was fired. However termination alone may be cold comfort to an employer who has suffered losses from fraud. Is there anything else that can be done?

Facts

The Defendant, Mr. C was an employee of the Plaintiff M-I Drilling Fluids Canada, Inc. ("MID"). Mr. C worked his way up to become a high-level manager, operating with significant discretion and minimal supervision.

Mr. C repeatedly certified that he had read and agreed to the company's Code of Ethics ("Code") which prohibited him from receiving payments from suppliers without first obtaining permission from MID.

Mr. C did not follow the Code. Unbeknownst to MID, between May 2009 and September 2013, Mr. C received kickbacks from two MID suppliers, one of whom was the Defendant, Ingeveld and Associates Ltd. ("IAL"). When MID discovered one of the IAL kickbacks in February 2012, it issued a written reprimand to Mr. C.

Despite the reprimand, Mr. C continued taking kickbacks without MID's knowledge. The scheme unravelled when another employee stumbled across evidence of additional kickbacks.

MID terminated Mr. C for cause and sued for the kickbacks.

Is Termination an Employer's only Remedy?

Mr. C claimed that MID's only remedy was termination for cause. Mr. C argued that MID had represented in its 2012 reprimand that he would only be terminated if he failed to abide by the Code in the future. As the reprimand said nothing about lawsuits, Mr. C assumed that the worst that could happen was termination. Based on this purported representation Mr. C argued that MID was estopped from advancing its claim.

These arguments were dismissed. The Court found that the reprimand neither released nor waived MID's remedies, including its right to sue. Furthermore the defence of estoppel failed since it required Mr. C to have "clean hands" before the Court and, as he had been engaged in dishonest conduct, his hands were not. Termination was not MID's sole recourse against Mr. C. It was entitled to advance a claim for its losses.

Causes of Action to recover Ill-Gotten Gains

MID advanced multiple arguments in an effort to recuperate its losses. In particular it claimed, and the Court found, that Mr. C: (1) breached his common law duties of good faith, fidelity and loyalty by making secret profits based on his position and placing his personal interests in conflict with that of MID; (2) breached his fiduciary duties; (3) committed civil fraud by falsely implying to MID that the purchase of supplies were arm's length transactions and that the best price had been negotiated; and (4) committed civil conspiracy with IAL with the aim that the company would buy IAL supplies at inflated prices.

MID was awarded a disgorgement of Mr. C's profits from the kickback scheme. The underlying principle for this decision was that Mr. C should not enjoy the fruits of his misconduct. The Court also found Mr. C's conduct to be malicious, oppressive and high-handed, and awarded punitive damages.

Lessons Learned

  • Codes of ethics and policies should include express provisions on conflicts of interest, with clear definitions, parameters and guidelines on how they are to be addressed.
  • Once the appropriate policies are in place, employees should certify that they have read, understood and agreed to them. MID did so, which permitted the Court to conclude that Mr. C knew what he was doing was wrong.
  • If a conflict of interest arises, conduct a thorough investigation. MID did not ask whether Mr. C had received other payments in 2012 or whether other workers had knowledge of Mr. C's scheme. Any such details could have been discovered earlier in an investigation.
  • Be careful not to waive any rights when issuing reprimands and warnings. Consider an express reservation of rights in written communications to prevent future arguments of waiver and estoppel.
  • Breach of contract, breach of fiduciary duty, civil fraud and civil conspiracy are claims that may be used in the appropriate case to recover ill-gotten gains and Courts may even impose punitive damages for wrongful conduct.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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