The employer’s duty of good faith

Bad faith can negate termination provisions

Background

One of the main reasons employers use written employment contracts is to obtain certainty regarding the amount of notice employees will be entitled to upon termination.

But a contractual notice period in the termination provisions of an employment contract will not always limit the notice obligation to the periods stipulated in the contract. Where the employer has exercised bad faith in the manner of dismissal, a British Columbia Superior Court has held the contractual notice period can be increased.

The case: Duprey v. Seanix Technology (Canada) Inc.

In this case Duprey, a commissioned salesman, sued Seanix Technology for damages for wrongful dismissal. He was also seeking damages for commissions due for sales made by the company after his termination which he claimed arose out of his efforts.

Following a long and successful career in the computer manufacturing industry, Duprey, a 56-year-old computer salesman, was hired by the Seanix as its director of retail sales. He was terminated after three months of employment.

The parties disagreed on a number of issues, including the terms of the employment contract, the question of whether the manner of termination ought to give rise to a lengthening of the notice period (“Wallace” damages), and the question of whether Duprey was entitled to payment of commissions on sales which were concluded following his termination but resulting from his efforts while he was still with Seanix.

In January 2000 Duprey met with senior managers of Seanix and was verbally offered the job of director of retail sales for Western Canada with compensation of $4,000 per month plus commission. Duprey immediately accepted the offer but asked that it be put in writing, which Seanix agreed to do.

Duprey received a document describing his responsibilities and setting out the commission structure. After reporting to work he received additional documentation, which included a position profile and a document setting out the terms and conditions of the employment agreement.

The letter, together with the employment agreement, provided that he would receive a salary plus a monthly commission equal to a percentage of the value of sales he was able to generate. The letter portion of the agreement stated, “commission is paid out on the last payroll on the following month it is earned.”

The agreement provided for a six-month probationary period. It also contained a termination provision which provided Seanix could terminate Duprey by giving him notice, or pay in lieu thereof, as stipulated in the Employment Standards Act of British Columbia. Duprey signed the agreement.

Following the start of his employment with Seanix, Duprey started discussions with Future Shop in an effort to get Seanix’s products carried by Future Shop for retail sale. Although that prospect did not materialize, Future Shop expressed an interest in finding a manufacturer to produce computers under its own brand name. Duprey facilitated discussions between Seanix and Future Shop with a view to having the two companies enter into an agreement where Seanix would manufacture computers for Future Shop.

Following a series of negotiations between Future Shop and Seanix, an agreement was entered into on May 10, 2000. That agreement proved to be very lucrative for Seanix and resulted in sales to Future Shop of more than $80 million worth of computers in the next two years.

On May 4, 2000, just six days prior to the execution of Duprey’s agreement with Future Shop, his employment was terminated by Seanix. He was still a probationary employee at the time. Seanix offered five reasons for Duprey’s dismissal, all relating to performance issues. But Duprey said his performance was beyond reproach in all respects and the real reason for the termination was so Seanix could avoid liability to Duprey for commissions on sales which were expected to be generated from the agreement with Future Shop.

The court found there was no merit in any of Seanix’s assertions that Duprey’s performance was inadequate. The judge found Seanix terminated Duprey’s employment to avoid paying him for work he had done, mainly for the commissions which would be generated by the contract with Future Shop.

In addition the judge found since Duprey had been told the reason for his termination pertained to his inadequate and substandard performance, and as the judge also found that Seanix did not honestly believe there was any genuine problem with his performance, the employer must be taken to have misled him by not explaining the real reason for the termination.

The judge found there was bad faith on the part of Seanix in the manner of termination and Duprey was, therefore, entitled to an additional notice period over and above the contractual period of notice.

Wallace damages (for more on Wallace v. United Grain Growers Ltd. see page 2910 in the Sept. 18, 2002 edition of CELT) are usually awarded in cases in which there has been bad faith in the manner of termination. The standard for dismissal of a probationary employee is suitability.

If the employer determines, in good faith, the probationary employee is not suitable for the position which he holds, then the employment may be terminated. During a probationary period it is accepted the employer has “an implied contractual right to dismiss a probationary employee without notice and without giving reasons provided the employer acts in good faith in the assessment of a probationary employee’s suitability for the permanent position.”

The judge determined Seanix did not act in good faith in its assessment of the suitability of Duprey for continued employment. Accordingly the judge determined Wallace damages should be awarded in this case, effectively extending Duprey’s damages beyond the contractually stipulated notice of one week. The judge awarded an additional month’s pay in lieu of notice on account of his claim for damages for wrongful dismissal.

In respect of Duprey’s claim for damages for commissions arising out of the sales made to Future Shop after his termination, the court had to consider whether the terms of the employment contract provided for commissions on such sales. Although Duprey vigorously argued it should be caught by the terms of the employment contract, the court found the contract contemplated retail sales in the traditional sense. This did not extend to the unique private label arrangement between Seanix and Future Shop. The court found the contract itself would be of no assistance in resolving Duprey’s claim to commissions arising out of the Future Shop agreement. The court found, however, that Duprey was entitled to recover the value of his services in respect of the Future Shop agreement on the basis of the value of the services he had performed.

The judge determined that 0.5 per cent commission on the sales to Future Shop in the first year was reasonable and appropriate based on a quantification of the actual value of the services performed for the employer.

For more information see:

Duprey v. Seanix Technology (Canada) Inc. (2002), 20 C.C.E.L. (3d) 136, (B.C.S.C.).

Protection is not absolute

This case serves as a warning to employers that contractually stipulated terms, especially when they are inserted for the protection of the employer, will not always limit the obligation to employees.

In this case the court found that, having breached its duty of good faith to its employee in the manner of termination, Seanix Technology owed an additional month’s notice to its employee notwithstanding the contractually stipulated one-week notice period upon termination. Such a result is somewhat surprising given the employment contract was drafted so as to set out the employee’s entitlement to notice in all cases of termination without cause.

Therefore, one could argue, the employer and employee had agreed at the start of the relationship that the employee would not be entitled to a lengthening of the reasonable notice period even where the termination has been made in bad faith.

The court also found, although the contract did not provide for commissions on the type of sales generated by the agreement with Future Shop, Duprey had made a valuable contribution to Seanix by brokering the relationship between the two companies and by initiating discussions which ultimately resulted in an agreement with Future Shop, and therefore he was entitled to be remunerated for that contribution.

This case illustrates that although employment contracts do provide a level of protection to employers, such protection is not absolute.

This in-depth look at employment contracts was provided by Peter L. Biro, an employment law lawyer and litigator with Goodman and Carr LLP in Toronto. He can be reached at (416) 595-2341 or [email protected].

To read the full story, login below.

Not a subscriber?

Start your subscription today!