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Employment - Duty of Good Faith. ITCAD Tech Inc. v. Patel et. al.
In ITCAD Tech Inc. v. Patel et. al. (Ont Div Ct, 2026) the Ontario Divisional Court dismissed an appeal, here involving a cross-claimed case where the motion court granted to plaintiffs [Patel] "summary judgment ... on their claim for the two months pay that had been withheld and awarded them punitive damages" and also found that the plaintiffs "had breached the non-competition clause in the contract between the parties and awarded" damages to the the defendants [ITCAD] (plaintiffs by counterclaim).
In this (apparently) employment context, the court considers issues of punitive damages as a remedy for breach of good faith:[28] ITCAD submits that the motion judge failed to apply the correct legal test when he awarded punitive damages. This test requires a finding that the conduct at issue represents “a marked departure from ordinary standards of human decency”: Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 S.C.R. 595, at para. 36. ...
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[30] .... The motion judge considered the appropriate test. In Boucher v. Wal-Mart Canada Corp., 2014 ONCA 419, 120 O.R. (3d) 481, the Ontario Court of Appeal set out the following three legal requirements from Whiten, for an award of punitive damages in the employment context. First, the conduct must be “reprehensible”, “‘malicious, oppressive and high-handed’ and ‘a marked departure from ordinary standards of decent behaviour.’”: Boucher, at para. 79. Second, the award must be “rationally required to punish the defendant and to meet the objectives of retribution, deterrence and denunciation”: Boucher, at para. 79. Third, “[t]he plaintiff must show that the defendant committed an actionable wrong independent of the underlying claim for damages for breach of contract”: Boucher, at para. 80. A breach of the duty of good faith and fair dealing can constitute such an actionable wrong: Boucher, at paras. 81-83.
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[32] Amongst the factors cited in para. 94 of Whiten are the following:(1) Punitive damages are very much the exception rather than the rule, (2) imposed only if there has been high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour. ....
[35] In Hill v. Church of Scientology of Toronto, 1995 CanLII 59 (SCC), [1995] 2 S.C.R. 1130, at para. 197, the Supreme Court of Canada confirmed, as ITCAD points out, that “courts have a much greater scope and discretion on appeal” when it comes to punitive damages. As put by the Supreme Court, “[t]he appellate review should be based upon the court’s estimation as to whether the punitive damages serve a rational purpose.” ....
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[37] With respect to the third requirement for punitive damages, the motion judge implicitly found that ITCAD’s withholding of compensation constituted a breach of ITCAD’s duty of good faith and fair dealing when his statement regarding the unacceptability of ITCAD’s conduct is followed by the following sentence: “The law is clear in the field of employment law that the employer has an implied duty of good faith and fair dealing.”: Motion Judge’s Decision, at para. 27. ITCAD had total control over the receipt and payment of the Consultants’ compensation for their work. This is a key aspect of the vulnerability and imbalance of power inherent in an employment relationship that drives the implied duty of good faith and fair dealing recognized by the Supreme Court of Canada in Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701. Although ITCAD submits that the motion judge erred by applying authorities that dealt with punitive damages in the employment context to an independent contractor, in my opinion, the motion judge did little more than accurately note the factual similarities that existed in the circumstances.
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[39] In terms of quantum, the motion judge awarded damages in an amount equal to approximately fifty percent of the amount of earnings knowingly withheld. He found that this amount was appropriate to “deter others from similar misconduct in the future”: Motion Judge’s Decision, at para. 29, citing Whiten, at para. 94. ITCAD argues that the damages awarded were excessive, while the Consultants submits that they should have been higher. Making an assessment as to what amount of damages is sufficient to deter the conduct from happening again is a discretionary exercise involving an assessment as to what number will rationally satisfy the purpose of deterrence. An amount that is too small “might simply be regarded as a licence fee…” to continue the misconduct at issue: Hill v. Church of Scientology, at para. 199. I am not satisfied that the motion judge erred when he assessed the amount at the number he did. . Matthews v. Ocean Nutrition Canada Ltd.
In Matthews v. Ocean Nutrition Canada Ltd. (SCC, 2020) the Supreme Court of Canada, correcting a conflation between damage issues in the courts below, emphasizes the difference in wrongful dismissal cases between breach for failure to give reasonable notice, and breach for breach of good faith.
Here the court considered the awarding of damages for 'benefits' that would have come due during the pay-in-lieu period [see esp. para 55]:B. The Appropriate Method of Analysis
[42] Properly understood, the claim pursued here indeed rests on allegations of distinct contractual breaches of Mr. Matthews’ employment contract.
[43] Neither party disputes that, at common law, an employer has the right to terminate the employment contract without cause — or, in this case, prompt the employee to choose to leave their job in circumstances that amount to a dismissal — subject to the duty to provide reasonable notice, a right which, as this Court noted in Farber v. Royal Trust Co., 1997 CanLII 387 (SCC), [1997] 1 S.C.R. 846, at para. 23, is reciprocal in the contract of employment. When breached, the obligation to provide reasonable notice does not, in theory, turn on the presence or absence of good faith: it is, in a manner of speaking, a “good faith” wrongful dismissal (see Machtinger, at p. 990). The contractual breach that arises from the employer’s choice in this regard is simply the failure to provide reasonable notice, which leads to an award of damages in lieu thereof (Wallace, at para. 115, per McLachlin J., as she then was, dissenting, but not on this point). There is some dispute in the cases regarding how to determine what damages should be awarded in the event of a breach, which I will consider below, but this breach does not turn on whether or not the employer acted honestly or in good faith.
[44] Running parallel to the argument on reasonable notice, Mr. Matthews has alleged that his termination was also in breach of contract because it failed to meet the expected standard of good faith. Under rules recognized by this Court in Bhasin and Potter, an unhappy employee can allege dishonesty in the performance of the contract by the employer — i.e., a breach of the duty of honest performance, which Cromwell J. in Bhasin described as contractual doctrine — independently of any failure to provide reasonable notice. This Court has also recognized in Wallace and Keays that an unhappy employee can allege mistreatment — i.e., conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive” — in the manner of dismissal by the employer (Wallace, at para. 98; Keays, at para. 57). A breach of the duty to exercise good faith in the manner of dismissal is also independent of any failure to provide reasonable notice. It can serve as a basis to answer for foreseeable injury that results from callous or insensitive conduct in the manner of dismissal, a point to which I will return to at the conclusion of these reasons (Wallace, at para. 88).
[45] Importantly, damages arising out of the same dismissal are calculated differently depending on the breach invoked. Again, this is nothing but a reflection of settled law. In Keays, at para. 56, for example, Bastarache J. helpfully explained that “[t]he contract of employment is, by its very terms, subject to cancellation on notice or subject to payment of damages in lieu of notice without regard to the ordinary psychological impact of that decision”. By contrast, he explained that failure to act in good faith during the manner of dismissal “can lead to foreseeable, compensable damages” based on the Hadley principle (para. 58). Contrary to what had been thought until that time, an extension of the notice period was not to be used to determine the proper amount to be paid (para. 59). This is because the nature of the contractual breach is of a different order than that associated with the failure to provide reasonable notice. Indeed, it is this fundamental difference that explains why principles of mitigation apply differently to mental distress damages flowing from a breach of the good faith obligation in the manner of dismissal (Evans v. Teamsters Local Union No. 31, 2008 SCC 20, [2008] 1 S.C.R. 661, at para. 32).
[46] With this in mind, I turn now to examine the duty to provide reasonable notice, which as will become plain, is dispositive of this appeal.
(1) Duty to Provide Reasonable Notice
[47] In the case at bar, the only disagreement in respect of reasonable notice turns on whether Mr. Matthews’ damages include an amount to compensate him for his lost LTIP payment.
[48] In my respectful view, the majority of the Court of Appeal erred by focusing on whether the terms of the LTIP were “plain and unambiguous” instead of asking what damages were appropriately due for Ocean’s failure to provide Mr. Matthews with reasonable notice. The issue is not whether Mr. Matthews is entitled to the LTIP in itself, but rather what damages he is entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract. By focusing narrowly on the former question, the Court of Appeal applied an incorrect principle, resulting in what I see as an overriding error.
(a) Redress for Breach of the Implied Term to Provide Reasonable Notice of Termination
[49] Insofar as Mr. Matthews was constructively dismissed without notice, he was entitled to damages representing the salary, including bonuses, he would have earned during the 15-month period (Wallace, at paras. 65-67). This is so because the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing “what the employee would have earned in this period” (para. 115). Whether payments under incentive bonuses, such as the LTIP in this case, are to be included in these damages is a common and recurring issue in the law of wrongful dismissal. To answer this question, the trial judge relied on Paquette and Lin from the Court of Appeal for Ontario. I believe he took the right approach.
[50] In Paquette, the employee participated in his employer’s bonus plan, which stipulated that employees had to be “actively employed” on the date of the bonus payout. That language is broadly comparable to that found in the LTIP which, at clause 2.03, requires the claimant to be a “full-time employee” of the company. In Paquette, but for the employee’s termination, the employee would have received the bonus within the reasonable notice period. The motion judge in that case, however, concluded that the employee was not entitled to the bonus because, while he may have been “notionally” employed during the reasonable notice period, he was not “actively” employed and so did not qualify under the terms of the plan.
[51] The employee’s appeal was allowed. The Ontario Court of Appeal relied principally on its prior decision in Taggart v. Canada Life Assurance Co. (2006), 50 C.C.P.B. 163, concerning a similar question related to pension benefits. In that case, Sharpe J.A. rightly cautioned that courts should not ignore the legal nature of employees’ claims. “The claim is not”, he said, “for the pension benefits themselves. Rather, it is for common law contract damages as compensation for the pension benefits [the employee] would have earned had [the employer] not breached the contract of employment” (para. 16). Consequently, “a terminated employee is entitled to claim damages for the loss of pension benefits that would have accrued had the employee worked until the end of the notice period” (para. 13). With respect to the role of a bonus plan’s contractual terms, Sharpe J.A. explained that “[t]he question at this stage is whether there is something in the language of the pension contract between the parties that takes away or limits that common law right” (para. 20).
[52] The Court of Appeal in Paquette built upon the approach in Taggart, proposing that courts should take a two-step approach to these questions. First, courts should “consider the [employee’s] common law rights” (para. 30). That is, courts should examine whether, but for the termination, the employee would have been entitled to the bonus during the reasonable notice period. Second, courts should “determine whether there is something in the bonus plan that would specifically remove the [employee’s] common law entitlement” (para. 31). “The question”, van Rensburg J.A. explained, “is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights” (para. 31).
[53] I agree with van Rensburg J.A. that this is the appropriate approach. It accords with basic principles of damages for constructive dismissal, anchoring the analysis around reasonable notice. As the court recognized in Taggart, and reiterated in Paquette, when employees sue for damages for constructive dismissal, they are claiming for damages as compensation for the income, benefits, and bonuses they would have received had the employer not breached the implied term to provide reasonable notice (see also Iacobucci v. WIC Radio Ltd., 1999 BCCA 753, 72 B.C.L.R. (3d) 234, at paras. 19 and 24; Gillies v. Goldman Sachs Canada Inc., 2001 BCCA 683, 95 B.C.L.R. (3d) 260, at paras. 10-12 and 25; Keays, at paras. 54-55). Proceeding directly to an examination of contractual terms divorces the question of damages from the underlying breach, which is an error in principle.
[54] Moreover, the approach in Paquette respects the well-established understanding that the contract effectively “remains alive” for the purposes of assessing the employee’s damages, in order to determine what compensation the employee would have been entitled to but for the dismissal (see, e.g., Nygard Int. Ltd. v. Robinson (1990), 1990 CanLII 1991 (BC CA), 46 B.C.L.R. (2d) 103 (C.A.), at pp. 106-7, per Southin J.A., concurring; Gillies, at para. 17).
[55] Courts should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right? . Krmpotic v. Thunder Bay Electronics Limited
In Krmpotic v. Thunder Bay Electronics Limited (Ont CA, 2024) the Ontario Court of Appeal considered aggravated damages, mental distress damages and the duty of honest performance in the employment law context:AGGRAVATED DAMAGES
[29] The appellants submit that the trial judge erred in awarding the respondent aggravated damages. They say that, following Honda Canada Inc. v. Keays, 2008 SCC 39, [2008] 2 S.C.R. 362, the trial judge could award aggravated damages only if there was evidence of both mental distress – that is, distress beyond the normal distress and hurt feelings resulting from dismissal – and that the mental distress was caused by the manner of dismissal. Accordingly, they contend, not only did the trial judge err in considering mental distress and the manner of dismissal separately, but also that, once he rejected the respondent’s claim for damages for mental distress, the trial judge was precluded in law from making an award for aggravated damages.
[30] I do not accept the appellants’ submission. In my view, it reflects an unduly narrow view of the employer’s duty of good faith during the termination process and the meaning of mental distress in that context. Further, I see no error in the trial judge’s determination that Mr. Caron’s conduct in the termination meeting breached that duty and caused Mr. Krmpotic harm deserving of compensation.
[31] The principles governing the employer’s obligations on termination are clearly articulated in a series of Supreme Court of Canada decisions that include Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701, at para. 98; Keays, at para. 58; and Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, [2020] 3 S.C.R. 64, at paras. 40, 44. Those principles can be summarised as follows.
[32] The duty of honest performance applies to all contracts, including employment contracts. It encompasses the employer’s duty to exercise good faith during the course of dismissal from employment. Breach of the duty of good faith occurs through conduct that is unfair or made in bad faith, as for example, by being “untruthful, misleading or unduly insensitive”. Callous or insensitive conduct in the manner of dismissal is a breach of the duty to exercise good faith.
[33] While the normal distress and hurt feelings resulting from dismissal are not compensable, aggravated damages are available where the employer engages in conduct that is unfair or amounts to bad faith during the dismissal process by being untruthful, misleading, or unduly insensitive, and the employee suffers damages as a consequence. As the trial judge noted, in Boucher v. Wal-Mart Canada Corp., 2014 ONCA 419, 120 O.R. (3d) 481, at para. 66, this court confirmed that aggravated damages compensate an employee for the additional harm suffered because of the employer’s conduct.
[34] Mental distress is a broad concept. It includes a diagnosable psychological condition arising from the manner of dismissal but is not limited to that. There is a spectrum along which a person can suffer mental distress as a result of the manner of dismissal. At one end is the person who suffers the normal distress and hurt feelings resulting from dismissal, which are not compensable in damages. At the other end of the spectrum is the person who suffers from a diagnosable psychological condition as a result of the manner of dismissal. In between those two end points, there is a spectrum along which the manner of dismissal has caused mental distress that does not reach the level of a diagnosable psychological injury.
[35] In my view, on a full reading of his reasons, the trial judge approached the issue of mental distress in that fashion. The fact that Mr. Krmpotic had not established, through medical evidence, that he had suffered a diagnosable psychological injury, was not the end of a consideration of the issue of mental distress damages. As the trial judge correctly understood, he had to go further and determine whether (1) the appellants’ conduct, during the course of termination amounted to a breach of their duty of honest performance; and (2), if so, whether Mr. Krmpotic suffered harm – beyond the normal distress and hurt feelings arising from dismissal - as a result of that breach. The trial judge found in Mr. Krmpotic’s favour on both matters: the appellants had engaged in conduct that amounted to bad faith during the dismissal process; and, Mr. Krmpotic suffered harm beyond the normal distress and hurt feelings that result from dismissal. These findings were fully open to the trial judge.
[36] The trial judge found that Mr. Caron breached the duty of good faith in the manner of dismissal in a number of ways. Mr. Caron claimed that Mr. Krmpotic had been dismissed for financial reasons and that the appellants’ financial statements would support that claim. However, he refused to produce the financial statements. Further, while the trial judge found that Mr. Caron was not directly untruthful with Mr. Krmpotic during the termination meeting, he had “no hesitation” in finding that Mr. Caron was neither candid nor forthright. He found that Mr. Krmpotic’s employment was terminated because his physical limitations restricted him from continuing to perform the wide array of job duties and responsibilities that he had performed for the appellants over the previous 29 years. He described Mr. Caron’s conduct during the termination process as the antithesis of what is required by the duty of good faith in dismissal. Mr. Krmpotic was terminated within two hours of returning to work after his back surgery. During the termination meeting, instead of being candid, reasonable, honest, and forthright, Mr. Caron engaged in conduct that was untruthful, misleading, and unduly insensitive.
[37] Reading the trial judge’s reasons as a whole, it is clear that he accepted that as a result of the manner of dismissal, Mr. Krmpotic was plagued by anxiety, depression, fear, poor sleep, frustration, and feelings of helplessness. That is, he found that Mr. Krmpotic suffered harm beyond the normal distress and hurt feelings resulting from dismissal.
[38] Accordingly, I see no basis for appellate interference with the trial judge’s determination of this issue.
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