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Good faith: Vital at all contractual stages

employee-termination-contract-probationIn Meloche c. Structures Lamerain inc., the Court of Appeal recently upheld the Superior Court’s decision to award moral damages, in addition to an award for pay in lieu of notice of termination of employment, to two employees who were dismissed in an abusive manner.

In this case, Alain and Yvan Meloche (the Meloches) sold 80% of their shares in their family business, Structures Lamerain inc. (Structures), to 9007-7520 Québec (7520 Québec), a company controlled by Kathleen, Yannick, Guillame and Sébastien Gardner (the Gardners).

The Meloches agreed to this sale on the condition that Structures would employ them for a period of at least 3 years thereafter to manage the business. In addition, the Memorandum of Understanding (“MOU“) provided that the Meloches were each entitled to an annual salary of $85,000 and a bonus of up to $30,000, subject to Structures achieving its target profits, as well as a payment representing 12 months of salary in the event of a termination without cause. The MOU also provided that 7520 Québec would purchase the remaining 20% of the shares in Structures upon the Meloches’ departure from the company.

Throughout the transition period prior to the closing of the sale, it became clear to the Gardners that they could not work with the Meloches. The Gardners decided to pursue the transaction in any event, but to terminate the employment of the Meloches upon signature of contracts. Indeed, on the day the sale was closed and the employment contracts were signed, the Gardners, on behalf of Structures, terminated the Meloches on the spot. The Meloches returned to Structures’ office to gather their belongings only to find that the locks had been changed and that Structures’ employees had already been informed of the Meloches’ immediate dismissal. In the weeks that followed, pursuant to the MOU, Structures provided each of the Meloches with pay in lieu of notice of $85,000, and 7520 Québec purchased the remaining 20% of Structures shares.

The Meloches alleged unjust and abusive dismissal and claimed 24 months pay in lieu of notice as well as moral and punitive damages solidarily from Structures, 7520 Quebec and the Gardners.

At the hearing, the defendants alleged that the Meloches were terminated for serious reason as a result of the negligent way they operated the business. The Superior Court determined that the fact that the Meloches did not agree with all of the Gardners’ suggestions did not make them negligent. Further, the evidence showed that during the transition period the Gardners never informed the Meloches of any dissatisfaction. In this regard, the Tribunal held that the defendants did not have a serious reason to dismiss the Meloches.

With respect to the pay in lieu of notice, the Superior Court agreed that the Meloches could not contractually forego in advance their right to reasonable notice and awarded damages representing 18 months of salary instead of 12 months. In its analysis, the Court considered the Meloches annual salary and the bonus entitlements provided in their employment contracts. Furthermore, as it relates to the Meloche’s obligation to mitigate their damages by actively searching for alternate employment, the Court stated that pursuant to their employment contracts, the Meloches were entitled to $85,000 each, without regard to their duty to mitigate the damages, and thus only deducted the revenue earned during the 6 month period which followed the 12 months following termination.

Regarding whether the Meloches were terminated “abusively”, the Superior Court determined that the Gardners should have informed the Meloches prior to the closing of the sale that they did not wish to work together. The Court concluded that the defendants acted abusively in allowing the Meloches to sell 80% of their shares in Structures based on the promise that their employment would continue post-closing, when, in fact, they had no intention to honor said promise.

In this regard, the Superior Court held that the defendants had lacked transparency, had humiliated the Meloches and that the prejudice caused to the latter went above and beyond that which normally results from a termination of employment. On these grounds, each of the Meloches were awarded $25 000 in moral damages. The Court did not award punitive damages.

Finally, the Superior Court held that the abusive circumstances of this case were enough to lift the corporate veil and hold the Gardners solidarily liable with 7520 Québec and Structures for the payment of moral damages to the Meloches.

The defendants appealed the trial judge’s decision to (i) set aside the terms of the termination clause providing for pay representing 12 months of salary; (ii) include bonus entitlement in the award for pay in lieu of notice; (iii) deduct from said award only the revenue earned during the final 6 months of the 18 month notice; (iv) award moral damages; (v) hold the Gardners solidarily liable with 7250 Québec and Structures for payment of such damages.

The Quebec Court of Appeal overturned the trial judge’s decision to include the bonus in the award for pay in lieu of notice, stating that no evidence was tendered to established that Structures had made any profit during the relevant years so as to be entitled to a bonus under the MOU.

All other decisions of the trial judge were affirmed by the Court of Appeal. Particularly, with regards to the payment of moral damages, the Court of Appeal reiterated that good faith obligations included the duty to be transparent, and that the appellants had acted in bad faith by misleading the Meloches into closing the sale and dismissing them just minutes after the sale was closed and the employment contracts signed, and by further changing the locks to the office and informing the employees. Further, the Court confirmed the trial judge’s decision to hold the Gardners responsible with Structures and 7520 Québec for moral damages due to their abusive behavior.

This case is a reminder for employers that good faith obligations exist even at the pre-contractual stages. In this case, the employer negotiated the transaction in bad faith, as there was no intention to continue the employees’ employment post-closing.

When an employer abuses of its right in terminating an employee by causing prejudice to the employee which goes above and beyond that which normally results from termination of employment, the employer exposes itself to damages apart from pay in lieu of notice of termination.

Stephanie Pasternyk, Avocate / Associate, Stikeman Elliott LLP

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