Faithless fiduciaries and employment bonuses: when can a company refuse to pay?

Analysis

Rossetto was an employee and vice-president of the plaintiff construction company, Mady. Mady discovered that for a period of 3 months in late 2007, Rossetto had diverted labour and materials from the company to carry out renovations on his home. Rossetto was terminated for cause upon discovery of his wrongdoing. Mady subsequently sued for damages for conversion, breach of employment contract, unjust enrichment and breach of fiduciary duty. Rossetto counterclaimed in respect of his bonuses for 2007 and 2008. The parties submitted the dispute for arbitration.  

Arbitrator’s decision

Mady argued that Rossetto had breached his fiduciary duty as a vice-president, and sought damages and an order that Rossetto’s conduct disentitled him to yearly bonuses for 2007 and 2008 as set out in his employment contract.  

The arbitrator ruled that although Rossetto was a fiduciary of Mady, Rossetto was entitled to be paid his bonuses as they formed “an integral part of his contract with Mady” and they had accrued before his termination.

The arbitrator awarded Mady $546,452.00 in damages for diversion of Mady’s resources, and awarded Rossetto $364,661.33 in satisfaction of his unpaid bonuses.

Superior Court decision

Mady appealed the arbitrator’s decision to the Superior Court of Justice. There, the Court reviewed jurisprudence dealing with breach of fiduciary duty in employment cases. The Court held that the arbitrator had recognized that Rossetto was a fiduciary of Mady, but that the arbitrator erred by concluding that Rossetto was nevertheless entitled to his bonuses. The Court held, at paragraph 16, that earlier cases such as McBride Metal Fabrication Corp. v. H.W. Sales Company Inc.¹ (“McBride”) and Canadian Aero Service Ltd. v. O’Malley² (“Canadian Aero”) stood for the proposition that “[t]he overriding principle is that a fiduciary is not entitled to compensation for the period of their wrongdoing”.

The Court further held that there was no reason to distinguish between salary and bonuses for the purpose of a determination of entitlement where a breach of fiduciary duty had been found, and that remedies for such a breach were intended to “put the aggrieved party in the position it would have been if the breach had not occurred.”  The Court held that the only way to return Mady to its original position was to deprive Rossetto of his bonus from the date of breach onward on the basis that “had Mady been aware that Rossetto was secretly diverting the company’s assets and resources”, Mady would have terminated Rossetto’s employment contract.

In the result, the Court allowed Mady’s appeal and held that Rossetto was disentitled from payment of his 2007 and 2008 bonuses as a result of his breach of fiduciary duty.

Court of Appeal decision

For the unanimous Court of Appeal, Justice Hoy allowed Rossetto’s appeal and restored the arbitrator’s award.  In upholding Rossetto’s entitlement to his bonus, the Court of Appeal set out the general principles governing fiduciary relief.

First, a breach of fiduciary duty does not always disentitle the offender to compensation such as bonuses. Fiduciary relief is equitable in nature and as such is discretionary. The remedies for breach of fiduciary duty are “dependent on all the facts before the court”.

Second, fiduciary relief is aimed at two goals: restitution and deterrence. Fiduciary relief is designed to address not only fairness between the parties, but also the public concern about the maintenance of the integrity of fiduciary relationships. Restitution is intended to return a beneficiary to the position he or she would have been in but for the breach.  Deterrence is intended to prevent fiduciaries from benefitting from their wrongdoing and maintaining the integrity of the fiduciary relationship.

In this case, the Court of Appeal upheld the award of Rossetto’s bonuses.  The Court of Appeal held that the award was reasonable, having regard to all of the facts and the general principles governing fiduciary relief. The Court of Appeal noted that Mady suffered a tangible loss as a result of Rossetto’s breach of fiduciary duty that was compensated for in the damages awarded to Mady for the diversion of Mady’s resources.  The Court of Appeal stated that by requiring Rossetto to compensate Mady for the time, money and resources he misappropriated, Mady was rightly put back in the same position it would have been in but for the breach.  The breach was the misappropriation and diversion of resources, resulting in an identifiable loss to Mady. The award of damages for diversion of Mady’s resources had the effect of depriving Rossetto of the benefit he gained from his wrongful conduct. The goals of restitution and deterrence were achieved. This was not a case where Rossetto was left unimpaired by his wrongdoing; Rossetto lost his job when he was dismissed by Mady.

The Court of Appeal also held that the Rossetto was as entitled to his bonus as he was to his regular salary. The Court of Appeal noted that the bonuses in this case were significant, non-discretionary and were an integral part of Rossetto’s compensation under his employment contract.

In considering the McBride decision in which bonuses were disallowed, the Court of Appeal noted, among other things, that damages were not awarded as no identifiable loss occurred and the behaviour leading to termination was ongoing at the time of termination.

In considering Procon Mining & Tunnelling Ltd. v McNeil³ (“Procon”), a case relied upon by Mady in the appeal, where a fiduciary was disentitled to a bonus, the Court of Appeal distinguished that case on the basis that the bonus claimed by the fiduciary was inextricably tied to his wrongful conduct and was not a “traditional performance bonus”.  The Court of Appeal also noted that in Procon, the fiduciary had resigned and immediate termination of his employment was not available to deter faithlessness. Rossetto, in this case, was dismissed as a consequence of his breach.

In conclusion, the Court of Appeal noted that the arbitrator’s award had served the two purposes of fiduciary relief: restitution and deterrence. The damages award for misappropriation put Mady back in the place it would have been but for Rossetto’s conduct, and it prevented Rossetto from gaining a benefit from his breach of fiduciary duty.

Conclusion

In Mady, the Court of Appeal clarified the law with respect to disentitlement of bonuses in the employment context for breach of fiduciary duty. The Court reaffirmed the principle that equitable remedies are ultimately discretionary and must be determined in accordance with the facts in each case.

The Court held that the nature of the bonus was a factor in determining whether the fiduciary is entitled to his or her bonus. Where a bonus payment is non-discretionary and forms a significant part of the employment contract, the Court may order that a bonus be paid notwithstanding a breach of fiduciary duty. Where a bonus is characterized as discretionary the fiduciary may be disentitled to payment.  The Court also held that whether there is an identifiable loss is another factor in determining whether the fiduciary is entitled to his or her bonus. Where there is no identifiable loss, the Court may order that the fiduciary is disentitled to payment to achieve the goal of deterrence.