On August 27, 2010 the Alberta Court of Appeal released a unanimous decision in Merrill Lynch Canada Inc. v. Soost, 2010 ABCA 251, a case concerning the summary dismissal of a high-performing financial advisor. At trial, in addition to awarding damages in lieu of notice, the Trial Judge awarded the financial advisor $1.6 million “for loss of reputation and book of business” resulting from the manner of the financial advisor’s dismissal. The Trial Judge stated that, absent such an award, the dismissed employee would have been “woefully undercompensated for his true loss”. He purported to base the award on principles from the recent Supreme Court of Canada decision Honda v. Keays (“Honda”).

The Alberta Court of Appeal quashed the $1.6 million damage award. The decision touches on a number of current issues related to damages for breach of contracts of indefinite hire and should be required reading for anyone practicing in the area of employment law as it offers a re-statement of first principles.

Frank Foran, Q.C. and Julie Hopkins of Borden Ladner Gervais LLP were retained by Merrill Lynch to conduct the appeal. The appeal concerned only the $1.6 million damage award.

Trial Decision

At trial, the Appellant Merrill Lynch advanced a number of grounds for alleging just cause for the Respondent’s summary dismissal. Although the Trial Judge found there was some merit to some of the grounds, he found that “after much consideration” they were not sufficient to justify summary dismissal of someone in the Respondent’s position. He assessed damages in lieu of notice at $600,000 based on a 12 month notice period.

Even though the Trial Judge found that Merrill Lynch believed in good faith that it had grounds to allege cause against the Respondent, the Trial Judge found that Merrill Lynch’s actions in purporting to dismiss the Respondent for cause were both “unfair and insensitive”.

He stated there was no good reason why once Merrill Lynch had decided to let Soost go, it could not have done so without some minimal notice or allowed Soost to resign on his own accord. The Trial Judge stated:

I am satisfied that the manner in which the Plaintiff was terminated had a significant detrimental affect on his reputation in the industry and in his ability to keep his old clients and attract new clients. I am also satisfied that the Defendant knew at the time it hired the Plaintiff that if it purported to terminate for cause and without notice, the Plaintiff would suffer significant damages to his reputation and book of business or goodwill such as would not be compensated for simply by an award of damages in lieu of notice.

The Trial Judge assessed “damages resulting from the manner of the Plaintiff’s dismissal as it relates specifically to reputation and book of business” at $1,600,000. He purported to do so on the basis of the principles of Honda although he acknowledged that, unlike Honda, this case was not one that concerned mental suffering.

Appeal Decision

The Alberta Court of Appeal quashed the $1.6 damage award on the basis that it purported, among other things, to compensate for matters that are not compensable at law.

1. The Employer’s Right to Dismiss and Honda Damages

The Alberta Court of Appeal began by restating principles related to wrongful dismissal and the employer’s right to dismiss an employee.

The Court reiterated that under a contract of indefinite term either side may validly end the contract at any time. An employer wishing to dismiss an employee without cause must either give long enough advance notice, or pay salary corresponding to that period of time. An employee has no right to be allowed to resign instead of being dismissed. Every employee can be dismissed at once with no notice and without any grounds. Most importantly the Court of Appeal stated “in ordinary circumstances, damages because of dismissal with neither reasonable notice nor pay in lieu cannot exceed what pay in lieu would have been.” [emphasis added]

The Court noted one exception to this principle, damages that are awarded where the manner of dismissal itself was unduly unfair or insensitive – so-called Honda damages. The Court stressed that the unfairness or insensitivity that justifies an award for Honda damages must be in the methods used to dismiss, not in the mere fact of dismissal, otherwise Honda damages would become an automatic enhancement to all damage awards for wrongful dismissal. There was nothing in the facts of this case to support the finding that anything in the manner of dismissal was unfair or unduly insensitive.

2. Honda Damages and Employer Good Faith in Alleging Cause

The Court noted that it is notoriously difficult to determine what constitutes just cause in particular circumstances and that “[i]n few cases can any solicitor advise an employer that it has ironclad grounds for dismissing a certain employee without notice.”

The Court stated that Honda damages do not arise just because an employer alleges cause but fails to prove it at trial if the employer has an honest belief that it has cause to dismiss an employee and especially where it has arguable grounds to do so. The alternative would be to impose heavy, almost automatic, penalties on employers who alleged cause in good faith but failed to prove it at trial. The Court of Appeal noted a number of policy reasons against this alternative including that the costs of payments made in lieu of notice to avoid such penalties would be passed on to innocent customers.

In this case, Merrill Lynch had both a bona fide belief and arguable grounds to allege cause and therefore Honda damages were not available as a result of alleging cause but failing to prove it at trail.

Although it was argued on behalf of the Respondent that the damages awarded could be justified on the basis they were to compensate him for the stigma of being dismissed, the Court of Appeal noted that dismissal itself is not a breach of the employment contract. An employee, therefore, gets no damages for the prejudicial effect of the dismissal itself. Honda damages are confined to cases concerning the manner of dismissal and not the dismissal itself.

3. Compensation for Wrongful Dismissal

The Court of Appeal stated that an employee with the usual contract of indefinite hiring has no right to keep a job, only a right to reasonable notice or pay in lieu (absent cause to dismiss). Damages are awarded in cases of wrongful dismissal for the failure to give reasonable notice, not for the loss of a job. The dismissal itself is not a wrong (even without cause), and there can be no compensation for it. Economic loss from being dismissed does not fall within Honda damages.

The Court of Appeal stated that although it is common for an employee to suffer losses going well beyond the lack of reasonable notice, to the extent they extend beyond the notice period, they are not compensable.  

4. The Application of Hadley v. Baxendale

The Court of Appeal stated, contrary to what appears to have been accepted in a few recent cases, that the principle of foreseeability of damages in Hadley v. Baxendale does not present a new head of damages available for breach of a contract of indefinite hiring.

The Court of Appeal confirmed that even clearly foreseeable losses are not compensated unless they are caused by a breach of the employment contract. Foreseeable losses from the fact of dismissal are not compensable, because dismissal is not a breach of contract. Only those flowing from lack of reasonable notice (or true Honda misconduct) are compensated. In this case, although the loss might have been foreseeable, it did not arise from the breach.

5. Unfair Competition by the Employer

The Respondent argued that the damages were warranted as Merrill Lynch, by setting up the manner and timing of the dismissal, had sought to unfairly compete with the Respondent for clients.

The Court of Appeal found there was no factual basis for the Respondent’s argument. The Trial Judge had found no tort had been committed and, in any event, an employer and employee are free to compete for clients after dismissal and such competition cannot form the basis for Honda damages.