THE ADVOCATES’ SOCIETY ANNUAL FALL CONVENTION NOVEMBER 15 – 18, 2007

TORT CLAIMS AGAINST THIRD PARTIES IN WRONGFUL DISMISSAL ACTIONS

submitted by: Janice Payne and Aman Sidhu Nelligan O’Brien Payne 66 Slater Street, Suite 1900 Ottawa, Ontario K1P 5H1 Tel: (613) 231-8245 Fax: 613-788-3655 E-mail: [email protected]

Nelligan O’Brien Payne LLP

www.nelligan.ca

TABLE OF CONTENTS

1.

INTRODUCTION

2.

TORT OF INTERFERENCE WITH BUSINESS/ECONOMIC RELATIONS a) b) c) d) e)

3.

TORT OF INDUCING A BREACH OF CONTRACT a) b) c)

4.

The Test Set Out In Reach Essentials Of The Test The Test Set Out In Sagaz Essentials Of The Test Recent Case Law

Essentials Of The Test Recent Case Law Earlier Cases - Tort Of Inducing A Breach Of Contract

CONCLUSION

Tort Claims Against Third Parties in Wrongful Dismissal Actions

1

Nelligan O’Brien Payne LLP

1.

www.nelligan.ca

INTRODUCTION

As more firms and individuals enter into non-standard employment relationships, creative counsel have been seeking to expand the scope of liability for employment - related losses to third parties. It has long been recognized that it is a tort to interfere with business/economic relations or to intentionally induce a party to breach a contract. These torts were founded long ago on the rationale that interference with the relationship of others (master – servant for our purposes) was wrong, in that it was tortuous against proprietary interests. Although the rationale has changed significantly in the modern era, the general purpose is to hold a party liable for wrongful interference with trade, business or other economic interests. 2.

TORT OF INTERFERENCE WITH BUSINESS/ECONOMIC RELATIONS

The origin of this tort stretches back to the 14th century when, by analogy to the writ of trespass for abducting a servant, a remedy was devised against taking away a servant by persuasion rather than by force1. It was not until 1853, in the case of Lumley v Gye2, that a basis was laid for the application of this tort to all manner of contractual relations. In Ontario, at present, there are two tests in use for the tort of interference with economic relations. They are: a)

The test set out in Reach3; The test set out in Sagaz4. THE TEST SET OUT IN REACH

In the Reach case, Pharmaceutical Manufacturers Association of Canada (PMAC), a voluntary trade Association, by a letter, told its members not to advertise in a calendar that had been created by Reach M.D. Canada Inc. (Reach). PMAC stated such advertising would contravene their marketing restrictions, which were imposed as a condition of membership in PMAC. PMAC’s action was fatal to Reach’s business. As a result Reach brought an action against PMAC for intentional interference with its economic interests and other torts. b)

ESSENTIALS OF THE TEST

Under the Reach test, the three elements to be met are: 1.

An intention to injure the plaintiff;

1

As quoted in, Fleming J.G., The Law of Torts, 7d ed.(Sydney: The Law Book Company Ltd., 1987) at p 651 42 E.R. 687 3 Reach M.D. Inc. v. Pharmaceutical Manufacturers (2003), 65 O.R. (3d) 30, (C.A.) 4 67112 Ontario Ltd. v. Sagaz Industries Canada Inc. (1998), 40 O.R. (3d) 229, affirmed at 2001 SCC 59 2

Tort Claims Against Third Parties in Wrongful Dismissal Actions

2

Nelligan O’Brien Payne LLP

2.

www.nelligan.ca

3.

Interference with another’s method of gaining his or her living or business by illegal means; Economic loss caused thereby.

c)

THE TEST SET OUT IN SAGAZ

Sagaz involved an action by the plaintiff for civil conspiracy and unlawful interference with economic relations. The plaintiff was an Ontario corporation known as Design Dynamics (Design). Design made synthetic sheepskin covers for automobile seats, supplying 50% of its total sales to Canadian Tire for 30 years prior to 1984. The defendant Sagaz Industries (Sagaz) was a Florida corporation, which also manufactured both genuine and synthetic sheepskin covers. Sagaz entered into a contract with American Independent Marketing (AIM) to market and sell its products in Canada. Summers was the head of the Canadian Tire automotive division. In 1984 Summers caused the seat cover contract to be awarded to Sagaz. It was later determined that Summers had taken a substantial bribe in return for awarding the business to Sagaz. He was convicted for corruption, imprisoned and his employment with Canadian Tire terminated. However, Canadian Tire decided to maintain the contract with Sagaz for their seat covers, stating that they preferred their design and that Design would have lost the contract with Canadian Tire in the long run. As a result Design sustained huge losses and ended up selling the assets of its manufacturing business in 1988. The court awarded Design $1,807,500 for the tortuous conduct of the defendants, along with $50,000 in punitive damages stating “this is a case where an award of punitive damages is appropriate”. Damages were determined based on a complicated evaluation of net losses in fair market value of assets, the value of the marketing business and monies realized on the sale of the assets. d)

ESSENTIALS OF THE TEST

Under the Sagaz test there are 6 elements, namely: 1. 2. 3. 4. 5. 6.

The existence of a valid business relationship or business expectancy between the plaintiff and another party; Knowledge by the defendant of that business relationship or expectancy; Intentional interference which induces or causes a termination of the business relationship or expectancy; The interference is by way of unlawful means; The interference by the defendant must be the proximate cause of the termination of the business relationship or expectancy; and There is a resultant loss to the plaintiff.

Both Sagaz and Reach follow from the decision in Cheticamp5, however, Reach is referred to more often now and is clearly an easier test to meet than Sagaz. Sagaz was affirmed at the Supreme Court of Canada level, while Reach is a Court of Appeal case. 5

Cheticamp Fisheries Co-Op Ltd. v. Canada, [1995] N.S.J. No. 127 (C.A.)

Tort Claims Against Third Parties in Wrongful Dismissal Actions

3

Nelligan O’Brien Payne LLP

e)

www.nelligan.ca

RECENT CASE LAW

The recent case of Even v. El Al Israel Airlines Ltd., 2006 CanLII 5305 (ON S.C.) followed the Reach test. In this case the El Al Airlines Ltd. had advised future employer travel agencies that it would terminate agreements with them if they employed the plaintiff. Based on the facts, the court made a clear finding that the actions of the airline were justified. The court found that the plaintiff had previously been dishonest in handling trust funds, resulting in a financial loss of $700,000. The airline was entitled to protect itself from the risk of future losses by refusing to do business with businesses employing such an employee. In view of the peculiar facts of this case, the plaintiff’s claim on the basis of interference, whether with business/ economic relations or with contractual relations, was dismissed. In order to establish that the alleged interference with economic relations was intentional, the plaintiff must show that the defendant's actions were directed or targeted at the plaintiff. Evidence that the defendant was acting in its own best interests and that the injury to the plaintiff was foreseeable were not sufficient to establish liability. However, the plaintiff need not prove that the defendant's predominant purpose was to injure the plaintiff. Rather, this element is satisfied as long as the unlawful act is in some measure directed against the plaintiff, even if "its predominant interest was to advance its own interest and those of its members". Once the element of intention is satisfied, the plaintiff must also establish that the defendant's interference with its business was accomplished by illegal or unlawful means. On this issue, Lord Denning's dictum in Torquay Hotel Co. Ltd. v Cousins6 is persuasive. He stated that unlawful means are not just acts in violation of a statute or acts specifically prohibited by law, but rather are acts which the defendant is not at liberty to commit. 3.

TORT OF INDUCING A BREACH OF CONTRACT

a)

ESSENTIALS OF THE TEST

In Butler v Dimitrieff, (1991) 38 C.C.E.L. 139 at 141 (Ont. Gen. Div.), the essential elements of the tort of inducing a breach of contract were described as: 1. 2. 3. 4. 5.

6

The existence of an enforceable contract; Knowledge on the part of the defendant of the existence of the plaintiff’s contract; An intentional act on the part of the defendant to cause a breach of that contract; Wrongful interference on the part of the defendant; Resulting damage.

[1969] 1 All. E.R. 522 (C.A.)

Tort Claims Against Third Parties in Wrongful Dismissal Actions

4

Nelligan O’Brien Payne LLP

b)

www.nelligan.ca

RECENT CASE LAW

In the recent case of Drouillard v Cogeco Cable Canada Inc. [2007] O.J. No. 1664 (Ont. C.A.), Cogeco Cable Canada did not want a former employee (Mr. Drouillard) working on its cable equipment, even on behalf of a contractor. Therefore, when Cogeco discovered that Mr. Drouillard had been hired by one of its contractors (Mastec), it advised Mastec that Mr. Drouillard would not be permitted to work on any of Cogeco’s property. Mastec therefore terminated Mr. Drouillard’s employment on his first day of work. Mr. Drouillard sued Cogeco for interference with his contractual and economic relations. Cogeco had an internal policy that it would refuse to work with a contractor when there was “reasonable cause”. The trial judge concluded that breaching this policy was an unlawful act, giving rise to liability for the tort of interference with economic relations. The Court of Appeal, however, overturned that element of the trial judge’s decision. The Court of Appeal concluded that it was inappropriate to extend the application of the tort to cover breaches of internal policies in the circumstances of this case. In other words, a breach of an internal policy is not, without more, an “illegal or unlawful” act. However, Cogeco did not escape liability. The Court of Appeal found that all elements of the tort of inducing breach of contract were satisfied on the evidence: 1. 2. 3.

4.

Drouillard had a valid and enforceable contract with Mastec; Cogeco was aware of the existence of this contract; Cogeco intended to and did procure the breach of the contract. The facts of the case indicated that this element has been satisfied. A Cogeco supervisor called Mastec and suggested that it would be in Mastec’s best interest to ensure that Drouillard was not employed there, Cogeco had a problem with Drouillard’s employment with Mastec, actions of Cogeco were directed against Drouillard personally and the primary and only target of Cogeco’s actions was Drouillard; As a result of the breach, Drouillard suffered damages.

The Court dealt with the defence of justification and found that it was not available because: “… Cogeco had meddled with and violated Drouillard’s employment agreement with Mastec, had acted contrary to its corporate policy, and that its conduct was malicious and punitive. According to the trial judge, there was also evidence of malice or unfair dealing on the part of Cogeco in acting aginst Drouillard’s attempt to obtain employment with Mastec…” c)

EARLIER CASES - TORT OF INDUCING A BREACH OF CONTRACT

In Unisys Canada Inc. v. York Three Associates Inc., [2001] O.J. No. 3777 (Ont. C.A.), a case dealing with a landlord and tenant issue, the court held that the conduct of the defendant did not amount to interference with Unisys’s contractual relations or an inducement of breach of contract. The court stated that the tort of inducing a breach of contract or intentional interference with contractual relations requires proof of the following elements:

Tort Claims Against Third Parties in Wrongful Dismissal Actions

5

Nelligan O’Brien Payne LLP

1. 2. 3. 4. 5.

www.nelligan.ca

An enforceable contract; Knowledge of the plaintiff’s contract by the defendant; An intentional act on the part of the defendant to cause a breach of that contract; Wrongful interference on the part of the defendant; and Resulting damage to one of the parties.

The court relied on Colonia Life Holdings Ltd. v. Fargreen Enterprises Ltd. (1990), 1 O.R. (3d) 703 (Gen. Div) at 708 [Colonia] and Posluns7. Similar reasons had been given in Ontario Store Fixtures Inc. v. Mmmuffins Inc. et al. (1989), 70 O.R. (2d) 42 (H.C.J.) [Mmmuffins]. Many Ontario cases have followed or mentioned Mmmuffins as the test for the tort of inducing a breach of contract. Notable among those are Thunder Bay (City) v. 1013951 Ontario Ltd., [2000] O.J. No. 1292 (S.C.J.), a case regarding the sale of land, restrictive covenants, and the issue of striking pleadings, the court mentioned Mmmuffins for the tort of interference with contractual relations. In Morris v Makos, [2006] O.J. No. 2919 (S.C.J.) there was a motion to strike pleadings and the court referred to Mmmuffins for the elements of inducing breach of contract. The court in General Accident Assurance Co. v. Chrusz, [2006] O.J. No. 1173 (S.C.J.) also relied on Mmmuffins for the test for interference with contractual rights. This case dealt with an alleged insurance fraud and the tort was alleged in the counterclaim by the defendants, but not made out. Ahmad v. Ontario Hydro, [1997] O.J. No. 3047, is another interesting case. The defendant had appealed from a judgment awarding the plaintiff damages for loss caused by intentional interference with the plaintiff's employment contract. The appellant argued that the trial judge erred in finding that certain notes that were destroyed would have been admissible. The appellant also claimed that the assessment of damages was unreasonable and that the trial judge erred in rejecting the defence of justification with respect to the libel claim. The court dismissed the appeal, stating that there was sufficient other evidence to support the finding that the defendant intentionally interfered with the plaintiff's employment contract. The damages assessed were reasonable and took into consideration the settlement monies received from the employer. This was an action8 alleging that the defendant forced the plaintiff's employer to constructively dismiss him from his job. The plaintiff, a professional engineer, had been promoted to head of Advanced Engineering Branch. He prepared a report which indicated that the plaintiff did not agree that ODS (onset of dry sheath) could be used in licensing applications. The defendant was determined to use ODS and threatened to pull out their contracts. The defendant and the 7

Posluns v. Toronto Stock Exchange, [1964] 2 O.R. 547 (H.C.), affirmed [1966] 1 O.R. 285 (C.A.), affirmed [1968] S.C.R. 330 8 [1993] O.J. No. 3104

Tort Claims Against Third Parties in Wrongful Dismissal Actions

6

Nelligan O’Brien Payne LLP

www.nelligan.ca

plaintiff's employer had a long standing relationship. The plaintiff was transferred to an office where he was the only employee. That office eventually ceased to exist. He received notice of his dismissal in October 1987 after commencing an action. He was unemployed for some time but then entered into an employment contract which was to end in March 1993. The plaintiff was 59 years old. The trial judge had relied on the test in Posluns, which refers to the tort of inducing a breach of contract and found that Ontario Hydro had intentionally interfered with the plaintiff’s employment contract to procure economic gain for itself. The court awarded damages “at large” to the plaintiff. The defendant’s counsel invited the court to deduct the $102,000 settlement figure from the overall award. The court refused to do so, stating that the concept of damages “at large” for the tort of inducing breach of contract was “a matter of impression not addition”. The court also awarded the plaintiff $40,000 in damages for libel. 4.

CONCLUSION

Employers who communicate negative opinions or information about former employees to a third party, causing the third party to refrain from hiring, rehiring or to breach a contract of employment, should act scrupulously and consult with counsel. Former employers should ensure that the communication is justified, supportable and for a legitimate purpose. If a court concludes that the purpose was not legitimate and was simply directed at injuring the plaintiff and that harm was caused, the former employee may well have a successful claim in tort against the former employer.

Tort Claims Against Third Parties in Wrongful Dismissal Actions

7