Canada: Paying The Price: Ontario Court Reminds Employers To Carefully Consider Their Approach To Litigation

Last Updated: September 19 2018
Article by Paul J. Willetts

Wrongful dismissal disputes are fairly common. In our experience they often resolve through negotiation and infrequently progress far into the litigation process. That said, sometimes cases of this nature do reach the court room and the parties usually fight over the quantum of severance sought, the type of payments claimed (i.e. bonus/commissions) and whether the former employee made reasonable efforts to find re-employment.

Every so often, however, an employer served with a wrongful dismissal claim may determine it necessary to bring a counter-claim against the former employee for matters such as breach of fiduciary duty, breach of a restrictive covenant or tortious conduct (e.g. interference with economic relations).

In the right circumstances, an employer response of this nature is not only reasonable, but can be strategically beneficial in the course of litigation. An employer, however, is best advised to be sure there is a reasonable basis to bring a counter-claim. Pursuing an unwarranted counter-claim as part of an aggressive litigation strategy can backfire and potentially result in unanticipated liability and an unwanted publicity.

The recent case of Ruston v. Keddco Mfg. (2011) Ltd. serves as cautionary tale for employers in this regard. This case originated with a claim brought by the former president of the company (Ruston) after he was dismissed for allegations of "fraud" and then brought an action seeking damages for wrongful dismissal.

The company responded by counter-suing Ruston for $1.7 million for alleged fraud, breach of fiduciary duty and unjust enrichment. The company also asserted that it had cause to terminate Ruston's employment.

The action proceeded to an 11-day trial, at which the company argued that Ruston had manipulated financial statements to inflate the company's profits, in a bid to increase his own resulting bonus payment.

At trial, Justice Chiappetta rejected the company's counter-claim in its totality, and instead awarded Ruston damages for wrongful dismissal, as well as moral damages ($25,000) and punitive damages ($100,000). Justice Chiappetta ruled that punitive damages were appropriate given that the company:

  • threatened Ruston with a hefty counter-claim if he proceeded with a court action, and followed through on this threat;
  • intimidated Ruston at the time of termination and took steps to prolong the litigation process and make it more expensive for him;
  • failed to call witnesses at trial with direct knowledge of its allegations against Ruston; and
  • made completely unfounded, and very serious, allegations against Ruston.

In total, Ruston was awarded damages in excess of $500,000. The situation, however, was made worse for the company as it was unable to agree legal costs payable to Ruston as the successful party and as such Justice Chiappetta was again required to weigh in on this action and the company's conduct during litigation.

In so doing, Justice Chiappetta sent a strong message to the company, and to any other employer that would consider engaging in similar tactics in responding to a wrongful dismissal claim of this nature. In particular, Justice Chiappetta awarded Ruston $546,684.73 in substantial indemnity costs (a significant sum in the context of any wrongful dismissal action). Justice Chiappetta confirmed his decision in this regard was a result of:

  • the company's pursuit of unfounded allegations of fraud which put Ruston's financial and professional future at risk, if proven in court;
  • the company's own conduct in dragging out the litigation process and taking steps to drive costs. Specifically, the company: refused to admit facts, but then failed to contest them at trial; refused to provide relevant financial documentation so that Ruston was forced to bring a motion; failed to comply with an order to produce will-say statements; caused the trial to be adjourned less than 6 weeks prior to its commencement by producing a 25-person witness list, resulting in a 1-year delay, double-preparation and a second pre-trial;
  • the counter-claim made the matter far more complicated than an ordinary wrongful dismissal claim, including the need for Ruston to spend $30,000 to call an expert witness; and
  • the company's threat to pursue expensive litigation, and following through on this threat, which caused Ruston to sell his house and survive on cashed-in RRSP savings.

Takeaway for Employers

It is important to carefully consider your response to an employer's wrongful dismissal claim. In certain circumstances, whether for financial, principled or precedential purposes, it will be necessary to engage in hard-fought litigation, looking perhaps to bring a counter-claim and make use of available court procedures in order to successfully defeat or offset a marginal, or baseless, claim.

That said, employers should exercise caution in adopting such an approach. The Keddco decision serves as an important reminder of the inherent risks in this regard, which are not only financial, but can, if allowed, result in unwanted attention for your business in the form of damning public decision.

This article was originally published on September 17, 2018 at First Reference Talks.

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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