By Graeme McFarlane

A recent case from Ontario illustrates a shift in judicial thinking with respect to the creation and operation of the employment relationship.  A short service employee won a judgement providing him with $500,000 in extra contractual damages in addition to eight months’ salary in lieu of notice.

The plaintiff in Antunes. v. Limen Structures Ltd. executed an employment agreement which provided that he be paid a starting salary of $150,000 and be awarded certain shares in the company.  Specifically, he was to be given five per cent of the company’s stock and “a potential option up to five per cent of the Residential Division within one year.”

Living Up to The Letter
Neither sets of shares were ever provided, and, just over five months into the job, Mr. Antunes was dismissed on a without cause basis.  The company purported to provide him with his last week’s salary and “an additional cheque for one week of pay to compensate him for any employment related expenses incurred during his tenure.”  Antunes did not accept this separation benefit and started a lawsuit for breach of contract, wrongful dismissal and negligent misrepresentation.

Before signing his contract, the company had informed Antunes that the company was worth $10 million.  Accordingly, he believed that the five per cent stake would be worth $500,000. This fact was a key factor in deciding whether to join the company. The company decided not to call the individual who was involved in Antunes’s hiring.  As a result, the Court drew an adverse inference and accepted Antunes’s evidence when it was in conflict with that of the company.

Company Responsible for Misrepresentation
The Court held that the company had misrepresented itself during the hiring process. In making this determination it said:

I am of the view that the defendant did not deal with the plaintiff honestly in the contractual negotiations.  There were misrepresentations made, upon which the plaintiff relied in accepting employment with the  defendant.  These included the misrepresentations made as regards the financial circumstances of the defendant corporation, which subsequently proved not to be accurate or true. While Lima advised the plaintiff that the company was valued at $10 million, there was no evidence to substantiate this. The plaintiff, based on his knowledge of Lima, a relative by marriage, did not doubt Lima’s word, as he knew or believed through the family relationship, that Lima was very successful in his business and also believed that he could trust his word. He relied on the values of the Corporation and his 5 per cent shareholding given by Lima in accepting the offer of employment. The initial shareholding of five per cent was never issued. Further, the evidence indicates that no Residential Division was in existence at any material time, nor had there been discussion of the creation of a Residential Division.

Honest Contractual Performance Applies to All
Key to this analysis is the application of the principle that all parties to a contract owe each other a duty to act honestly with respect to the contracts provisions.  This principle has recently emerged from the Supreme Court of Canada’s decision in Bhasin v. Hrynew.  In that case the Court introduced a general duty of “honest contractual performance” that applies to all types of contracts including those dealing with employment issues.  Prior to Bhasin, courts had resisted this notion in employment cases so as not to be seen as rewriting the terms of the contract after the fact.

The decision regarding the remedy in Antunes also departs from traditional awards.  In previous decisions, courts generally awarded tort-like damages intended to place the person in the same position as they would have been before the representation was made.  Applying that doctrine to this case, Antunes would have received little or no award for the share misrepresentation by itself.  However, the judge instead applied a contractual damages approach and calculated what would have been obtained had the contractual promise been fulfilled.  That analysis resulted in the $500,000 portion of the award.

Seller Beware
This case demonstrates new challenges that face employers in the hiring phase.  Extreme care must be taken when delivering messages to would be employees.  Over-promising compensation or potential equity benefits can result in damages equaling those unfilled promises.  At least in hiring, it may now be best to sell the steak rather than the sizzle.

Graeme McFarlane is a partner at Roper Greyell LLP, a firm focused on partnering with companies to find solutions to workplace issues.

(PeopleTalk Summer 2016)