The Alberta Court of Appeal has released an important decision which greatly clarifies the rights and obligations that exist under a contract of employment between an investment dealer and an investment advisor.

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 under compensated 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 decision of the Alberta Court of Appeal, which quashed the $1.6 million damage award, touches on a number of important issues related to damages for breach of employment contracts of indefinite term.

The Court of Appeal 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. No employee has a right to work after dismissal. 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.”

It noted one exception to this principle, so-called Honda damages, that are awarded where the manner of dismissal itself was unduly unfair or insensitive. It stressed that the unfairness or insensitivity that justifies 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.

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 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.

Of interest to those who provide advice to brokerages, the Court of Appeal found that an award to compensate for “the loss of the book of business” in addition to the award for damages in lieu of notice was in effect double counting. The Court of Appeal stated that damages for loss of a book of business might look somewhat plausible if it were treated as a capital item but in fact its value is merely the present value of future income which is essentially the same as what is compensated for in failure to give reasonable notice – lost future income.

Merrill Lynch paid the Respondent on a commission basis. On dismissal without notice, the Respondent was awarded an amount based on an estimate of commission that would be earned during the one-year notice period. In addition, the Trial Judge gave the Respondent an additional sum (equal to about a further 2-2/3 years salary) to compensate for future lack of earnings based on commission. The Court of Appeal stated “the trial judgment here in effect gave lost income, but in total (both heads) equivalent to a notice period of 3-2/3 years…That could not possibly be justified from case law.”

The Court of Appeal also ruled on the issue of whether compensation was payable because the manner of dismissal limited the Respondent’s ability to compete for clients. 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. 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.