Examining Wallace v.
United Grain Growers Ltd.

By Michael F. Smith LL.B., LL.M.

In the fall of 1997 the decision of the Supreme Court of Canada in Wallace v. United Grain Growers Ltd.⁽¹⁾ created a stir among lawyers. In his judgment, Justice Iacobucci, speaking for the majority, spoke of the obligation of good faith and fair dealing that employers have toward their employees in the course of dismissal. He defined that obligation of good faith to include, at minimum, an obligation to be candid, reasonable, honest and forthright with employees and to refrain from engaging in conduct that is unfair, untruthful, misleading or unduly insensitive.⁽²⁾

To any lawyer who had ever tried to explain the legal limitations of a claim for damages for wrongful damages to an angry, depressed or demoralized ex-employee, the recognition of an obligation of good faith and fair dealing on the part of employers was very encouraging. To those of us who advise employers the decision struck a loud note of warning and caution.

At common law the action for wrongful dismissal is based on a term, usually implied by law, that an employer must give reasonable notice of his or her intention to terminate the contract of employment. Failure to provide such notice will make the dismissal wrongful and render the employer liable for damages, usually equivalent to the wages and other benefits that would have been earned during the appropriate notice period, subject to the employee's duty to mitigate damages by seeking alternate employment. Unfortunately, discharged employees often suffer significant non-economic injuries because of the dismissal, particularly in cases where the circumstances or manner of termination have been capricious, callous, insensitive, malicious or otherwise in bad faith. The non-economic injuries might include harm to reputation or mental distress, variously described as emotional upset, hurt feelings, shock, anxiety or depression.

At Trial

Jack Wallace, himself, the plaintiff in Wallace, had proven such non-economic injuries at trial, leading Lockwood, J. to find that, as a result of the manner of dismissal, Wallace had suffered shock, anger, upset and irritability, a loss of self-esteem, a loss of confidence; he had difficulty concentrating, he became obsessed with the case, his blood pressure rose and his relationship with his wife deteriorated.⁽³⁾ Psychiatric evidence confirmed that Wallace had suffered a severe psychological blow to his identity and a marked, and possibly permanent, psychological trauma.⁽⁴⁾

Further, the trial judge found that word had got around that Mr. Wallace must have done something reprehensible and that the peremptory dismissal and the defendant's subsequent actions made other employment in the plaintiff's field "virtually unavailable" to him.⁽⁵⁾

Wallace had worked for the defendant employer for 14 years and was 59 years old when dismissed. When Wallace left secure employment to join the defendant at age 45 he had been assured of fair market treatment and secure employment by the marketing manager who recruited him.

However, the court found that Wallace's dismissal was sudden and unjustified. Further, that the employer had persisted in groundless allegations of insubordination, incompetence, breach of confidence and conflict of interest throughout the litigation.⁽⁶⁾

As a result at trial, Wallace, was awarded 24 months salary ($157,700.00) in lieu of notice and aggravated damages of $15,000.00, the latter award being based on:

(a) the plaintiff's claim for breach of contract, i.e. the unjustified dismissal, regarded in the circumstances as an actionable wrong separate from the failure of notice; and,

(b) the plaintiff's tort claim for the "wilful or negligent infliction of harassment" arising from the forseeability of the mental distress that would result from the manner in which the dismissal was handled and by the defendant's decision "to play hardball" with the plaintiff.

Lockwood, J. found support for his judgment in the decision of Galligan, J. in Pilon v. Peugeot Canada Ltd.⁽⁷⁾ (1980) 29 O.R. (2d) 711 (H.C.).

In Pilon a loyal, long-term employee was subjected to a "callous, sudden and arbitrary" dismissal. The employer paid only three months wages in lieu of notice, much less than the twelve months notice judged appropriate by the court. Pilon had been promised job security. The peremptory dismissal caused him acute anxiety affecting his mental health and his relationship with his wife and family.

In the circumstances of the case and based on the principles set out in Hadley v. Baxendale⁽⁸⁾ the court concluded that the plaintiff's mental distress was a forseeable consequence of the wrongful dismissal, wrongful, that is, specific because of the adequate notice. The court went so far as to say that if the employer had paid the plaintiff for the appropriate notice period, he would not have been entitled to recover damages for mental distress. Thus, Pilon became the first plaintiff in Canada to be awarded damages for mental distress for wrongful dismissal.

In Wallace, too, the trial court viewed the unjustified dismissal without warning as a separate actionable wrong, being a breach of an implied term of the contract of employment that Wallace would not be dismissed without cause.⁽⁹⁾ The mental distress resulting from that wrong was, therefore, compensable.

On Appeal

The Pilon⁽¹⁰⁾ decision was not appealed but judgment in Wallace was. On appeal it was held that the common law does not allow compensation for injuries such as mental distress (or aggravated or punitive damages) neither in contract nor in tort., in a case of wrongful dismissal⁽¹¹⁾

Scott, C.J.M., speaking for the court, was guided principally by the leading case of Vorvis v. Insurance Corporation of British Columbia.⁽¹²⁾ In that case, McIntyre, J., had relied on the authority of Addis v. Gramaphone Co.⁽¹³⁾ and the Supreme Court's own decision in Peso Silver Mines Ltd. (N.P.L.) v. Cropper⁽¹⁴⁾ to rule, for the majority, as follows.

... I would conclude that while aggravated damages may be awarded in actions for breach of contract, this is not the case where they should be given. The rule long established in the Addis and Peso Sliver Mines cases has generally been applied to deny such damages, and the employer/employee relationship (in the absence of collective agreements which involves consideration of the modern labour law regime) has always been one where either party could terminate the contract of employment by due notice and therefore the only damage which would arise would result from a failure to give such notice.⁽¹⁵⁾

...in wrongful dismissal damages are limited to earnings lost during the period of notice and cannot include damages for the manner of dismissal, for injured feelings or for loss sustained from the fact that the dismissal makes it more difficult for the plaintiff to obtain other employment.⁽¹⁶⁾

However, McIntyre, J., went on to say:

I would not wish to be taken as saying that aggravated damages could never be awarded in a case of wrongful dismissal, particularly where the acts complained of are also independently actionable, a factor not present here.⁽¹⁷⁾

In Vorvis the court had also cleared-up some confusion between the concept of punitive damages and aggravated damages, adopting the distinction made by Professor Waddams in his text The Law of Damages.⁽¹⁸⁾ Aggravated damages aim at compensation but take full account of the intangible injuries, such as distress and humiliation, that may have been caused by the defendant's behaviour. Damages going beyond compensatory are exemplary and punitive damages. In Vorvis, McIntyre, J., expressed the opinion that damages for mental distress are properly characterized as aggravated damages.⁽¹⁹⁾

In Vorvis, McIntyre, J., specifically addressed the need in a wrongful dismissal case for an actionable wrong, separate from the failure of notice itself, in order to ground a claim for aggravated (or punitive) damages. He cited with approval the opinion of Weatherston, J.A., in Brown v. Waterloo Regional Board of Commissioners of Police.⁽²⁰⁾

If the course of conduct of one party causes loss or injury to another, but is not actionable, that course of conduct may not be a separate head of damages in a claim in respect of an actionable wrong. Damages, to be recoverable, must flow from an actionable wrong. It is not sufficient that a course of conduct, not in itself actionable, be somehow related to an actionable course of conduct.⁽²¹⁾

As a result, in Wallace the Manitoba Court of Appeal ruled that the plaintiff was not entitled to either damages for mental distress or aggravated damages because there had been no funding by the trial judge of a separate actionable wrong overruling the trial judge's finding of an "implied term" of the job security, the appellate court emphasized instead the finding that there was no fixed-term contract (i.e. until retirement) and thereby implicitly rejected the supposed breach of that implied term as a separately actionable wrong.⁽²²⁾

In relation to all the claims in tort, for mental distress and aggravated and punitive damages, the court held that such claims must be based on a separately actionable course of conduct.⁽²³⁾ In the opinion of Scott, C.J.M., the decisions in Pilon⁽²⁴⁾, Speck v. Greater Niagara General Hospital and Riberio v. Canadian Imperial Bank of Commerce⁽²⁵⁾ were no longer persuasive⁽²⁶⁾.

The appeal court, therefore, the appropriate notice period from 24 months to 15 months, feeling that "an element of aggravated damages must have crept into the determination" of the notice period by the trial judge. Generally, Scott, C.J.M., citing Wiebe v. Central Transport⁽²⁷⁾, disapproved of the tendency to increase notice periods substantially beyond the 12 month level provided by McRuer, C.J.H.C., in Bardal v. Globe & Mail⁽²⁸⁾ and adopted by The Supreme Court in Machtinger v. HOJ Industries Inc.⁽²⁹⁾

In the Supreme Court

In the Supreme Court of Canada Wallace's claim for damages for mental distress was rejected of by Iacobucci, J., in just two paragraphs. Confirming Vorvis the court held that any damages for breach of contract beyond compensation for the failure to give reasonable notice of termination must be based on "a separately actionable course of conduct."⁽³⁰⁾ The court also ruled that the requirement of a separately actionable wrong prevents any reliance on concepts of forseeability and matters in the contemplation of the parties.⁽³¹⁾ The court regarded as exceptional the line of cases awarding damages for mental distress based on Jarvis v. Swan Tours Ltd., ⁽³²⁾ being cases in which peace of mind was the very matter contracted for. Remarkably, the court did not comment on the Court of Appeal's opinion that Pilon, Speck and Riberio should not be followed.⁽³³⁾

What was innovative in the Wallace judgment was the majority's ruling that bad faith conduct in the manner of dismissal is a factor that is properly compensated for by an addition to the notice period.⁽³⁴⁾ Previous rulings, based on the Addis and Peso Silver Mines judgments, in the opinion of Iacobucci, J., were flawed because they had failed to consider the "unique characteristics" of the contract of employment and the special relationship which it governs.⁽³⁵⁾ The judgment identified some of the unique characteristics of the employment contract and the employer-employee relationship that are relevant to the effect of bad faith in the course of dismissal:

­ a power imbalance between the master and servant;

­ the vulnerability of employees as a group;

­ the importance of employment as an essential component of an individual's sense of identity, self-worth and emotional well-being;

­ that the loss of one's job is always a traumatic event; and,

­ acts of bad faith in the manner of discharge can be especially devastating.⁽³⁶⁾

Furthermore, the court held, contrary to previous judgments,⁽³⁷⁾ that bad faith conduct is a relevant factor in determining reasonable notice even where such conduct does not, in itself, affect the prospects of re-employment:

...in my view the intangible injuries are sufficient to merit compensation in and of themselves. I recognize that bad faith conduct which affects employment prospects may be worthy of considerably more compensation than that which does not, but in both cases damage has resulted that should be compensable.⁽³⁸⁾

Writing for the minority (La Forest and L'Hereux-Dube, J.J., concurring) McLachan, J., saw the general principle in Vorvis to be that damages for wrongful dismissal are restricted to damages for the breach of the implied obligation of reasonable notice and that unless the manner of termination increased the time required to find new employment damages arising from the manner of dismissal must be grounded in an independent cause of action.⁽³⁹⁾ McLachlan, J., however, would provide, or create, that independent cause of action by implying by law the requirement of good faith and fair dealing as a term of the contract of employment.⁽⁴⁰⁾

In her view such an implied contractual obligation of good faith is an appropriate development of the law because

­ it responds the unique characteristics of the employment contract⁽⁴¹⁾

­ it is supported by the previous decisions of the court⁽⁴²⁾

­ it is supported by the weight of academic commentary⁽⁴³⁾

­ it is consistent with similar obligations of good faith and fair dealing in other areas of contract law⁽⁴⁴⁾, and

­ it is consistent with the incremental, step-by-step development of the law approved in Watkins v. Olafson [1989] 2 S.C.R. 750 and R. v. Salituro [1991] 3 S.C.R. 654 at 668.⁽⁴⁵⁾

McLachlan, J., would have upheld the trial judge's award of $15,000.00 on Wallace's claim for mental distress and loss of reputation as general damages flowing directly from the employer's independently actionable breach of the implied term of good faith and fair dealing.⁽⁴⁶⁾

The Supreme Court restored the trial judge's assessment of 24 months notice, remarking that it was in the high end of the scale but not unreasonable taking into account all the relevant factors, including the bad faith conduct of the employer. The trial judge's award of $15,000.00 for aggravated damages was not restored.

CONCLUSION

In Wallace both the Court of Appeal and the Supreme Court were urged to recognize the right of dismissed employee to sue, in contract and in tort, for "bad faith discharge". Both courts refused to do so.

Scott, C.J.M, stated there was no authority for the proposition that the employer has a duty to take care in the discharge of an employee to minimize or eliminate mental suffering or other adverse consequences to the employee⁽⁴⁷⁾

Iacobucci, J., felt that imposing on implied term on the employment contract, requiring that an employee would not be fired except for cause or legitimate business reason, would negate the long recognized, mutual right of employers and employees to terminate employment at any time, subject to notice. In his view, to impose such a term by implication of law would be "overly intrusive" and inconsistent with established principles.⁽⁴⁸⁾ Further, to create a tort, for breach of an obligation of good faith and fair dealing in dismissals, would be a radical step better left to the legislatures.⁽⁴⁹⁾

It seems, however, that the obligation of good faith and fair dealing recognized by the majority, but restricted in its enforcement to an addition to the notice period, is a poor substitute for implied term of good faith and fair dealing that the minority preferred.

In two recent cases the Wallace judgment has been applied to extend already long notice periods by six months⁽⁵⁰⁾ but one wonders what remedy would be available in a case in which efforts to mitigate, by finding alternative employment, have been successful.

In Pilon, for example, loss of income in the year following dismissal amounted to only $1,000.00, due to the plaintiff's efforts to mitigate. However, the court awarded damages of $7,500.00 for mental distress. In Vorvis the period of unemployment following dismissal was only seven months. In such cases, a "bad faith" addition to the otherwise appropriate notice period would be negated by the injured plaintiff's own efforts to mitigate.

If, indeed, "intangible injuries are sufficient to merit compensation in and of themselves", as the majority ruled, by what principle should that compensation be linked to a plaintiff's wage rate? Would a lower-paid plaintiff suffering intangible injuries similar to those of another, but higher-paid plaintiff, be entitled to a longer additional notice period in order that the compensation actually paid would be similar? One must wonder whether the limited remedy made available by the Wallace decision will be effective in a broad range ofcases.

The decision in Francis v. Canadian Imperial Bank of Commerce⁽⁵¹⁾ suggests the direction that plaintiffs and their counsel might take if aggravated damages are unavailable and additional notice an insufficient remedy. In Francis, a case involving an especially outrageous dismissal and unsubstantiated allegations of dishonesty by a bank employee, the Ontario Court of Appeal refused damages for mental distress and aggravated damages but increased the trial judge's award of punitive damages from $15,000.00 to $40,000.00⁽⁵²⁾

In two post-Wallace decisions⁽⁵³⁾ the same court has refused to change awards of punitive damages made at trial pre-Wallace. Additional evidence that punitive damages might become more available post-Wallace is provided by the judgment in Ben David v. Congregation B'Nai Israel.⁽⁵⁴⁾ Joseph BenDavid, a 59 year old Rabbi, was dismissed on nine working months notice, after 26 years of service. The employer's unfounded allegations of cause (withdrawn just before trial) were viewed as a malicious attack justifying an award of punitive damages of $20,000.00, in addition to a 30-month notice period.

Michael F. Smith
Bennett Best Burn LLP
Barristers and Solicitors
150 York Street, Suite 1700
Toronto, ON M5H 3S5

NOTES:

1. (1997) 3 14000 701

2. Ibid, at para 98

3. Wallace v. United Grain Growers Ltd. (1993) 87 Man.R. (2d) 161 (Q.B.) at para. 64

4. Ibid, at para 72

5. Ibid, at para 44-46

6. Wallace at trial p. 75-82

7. Pilon v. Peugeot Canada Ltd. (1980) 29 O.R. (2d) 711 (H.C.). The court also relied on the judgment of McLachlan, J., as she then was, in Rahemtulla v. Vanfed Credit Union (1984) 3 W.W.R. 296 (B.C.S.C.)

8. Hadley v. Baxendale (1854) 9 Ex. 341 at 354, 156 E.R. 145, pp. 354-55 and at p151, as follows:

In Vorvis, Wilson J., (dissenting) set out the essence of the law of contract as it relates to damages and remoteness as stated by Baron Alderson in Hadley v. Baxendale

Now we think the proper rule in such a case as the present is this: ­ Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants and thus known to both parties the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them.

However, since the decision in Cox v. Philips Industries Ltd., supra [1976] 3 All E.R. 161 (Q.B), the Court of Appeal in England has departed from what in my opinion is the sound proposition that damages for mental distress can be recovered for breach of contract when it can be said to have been in the reasonable contemplation of the parties when the contract was made that its breach would cause such distress. In Bliss v. South East Thames Regional Health Authority, [1987] I.C.R. 700, the Court of Appeal reversed the decision of the trial judge to award damages for frustration and mental distress which an employee experienced when his employer breached his employment contract by requiring him to go for a psychiatric examination after an angry dispute with a colleague, Dillon L.J., concluded that the views expressed by Lawson J., in Cox v. Philips Industries Ltd. were wrong and that, in the absence of its reversal by the House of Lords, the general rule barring such damages in Addis v. Gramophone Co. was the law in England subject to a narrow exception. He said at pp.717-18:

The general rule laid down by the House of Lords in Addis v. Gramophone Co. Ltd. [1909] A.C. 488 is that where damages fall to be assessed for breach of contract rather than in tort it is not permissible to award general damages for frustration, mental distress, injured feelings or annoyance occasioned by the breach. Modern thinking tends to be that the amount of damages recoverable...

9. Wallace (trial) at para 56-57

10. Pilon, supra note ?

11. (1994) 95 Man.R.(2d) 65 (C.A.)

12. [1989] 1 S.C.R. 1085

13. [1909] A.C. 488

14. [1966] S.C.R. 673

15. Vorvis, supra note 6, at 1103

16. Ibid, at 1100

17. Ibid, at 1104

18. Waddams, S.M. The Law of Damages, 3^rd Edition, Toronto: Canada Law Book Inc., 1997, p. 483. A definition of aggravated damages is set out in Huff v. Price (1990) 76 D.L.R. (4^th) 138 at 153 (B.C.C.A.) as follows:

(Aggravated damages} are designed to compensate the plaintiff, and they are measured by the plaintiff's suffering. Such intangible elements as pain, anguish, grief humiliation, wounded pride, damages self-confidence or self-esteem, loss of faith inn friends or colleagues, and similar matters that are caused by the conduct of the defendant, that are of the type that the defendant should reasonably have foreseen in tort cases or had in contemplation in contract cases, that cannot be said to be fully compensated for in an award for pecuniary loses, and that are sufficiently significant in depth, or duration, or both, that they represent a significant influence on the plaintiff's life, can properly be the basis for the making of an award for non-pecuniary losses or the augmentation of such an award.

19. Vorvis, at p. 1099

20. (1983) 43 O.R. (2d) 113

21. Vorvis, supra note 6, at1104

22. Wallace (C.A.) at para 65-69

23. Wallace (C.A.) at para 100

24. Pilon 1983) 43 O.R. (2) 611 (H.C.)

25. Riberio v. Canadian Imperial Bank of Commerce (1989) 67 O.R. (2d) 385 (H.C.), varied (1992) 13 O.R. (3d) 278 (C.A.) (leave to appeal to S.C.C. denied 157 N.R. 400n)

26. Wallace (C.A.) at para 101.

27. (1994) 95 Man.R. (2d) 65 (C.A.)

28. (1960) 24 D.L.R. (2d) 140 (Ont.H.C.)

29. Machtinger v. HOJ Industries Inc. [1992] 1 S.C.R. 986

30. Wallace, supra note 1, at para 73

31. Ibid

32. [1973] Q.B. 233 (C.A.)

33. Scott, CJM., speaking for the court said that while at the trial level damages for mental distress had been awarded even where the acts complained of had not been independently actionable, the appellate courts have held that damages for mental distress or aggravated damages must be based on conduct which is independently actionable. He cited Weiler, J.A., in Francis v. C.I.B.C. (1994) 21 O.R. (3d) 75 at (C.A.):

"Here no medical evidence was presented at trial to support a claim for mental distress. The trial judge did not make a specific finding, that in the words of McIntyre, J., the conduct of the Bank was also independently actionable." Accordingly, I do not think there is any basis for an award of aggravated damages, or for an award of damages for mental distress.

34. Wallace, supra note 1, at para 88

35. Ibid, at para 90

36. Ibid, at para 91-96

37. See for e.g.. Track v. Terra Nova Motors Ltd. (1995) 9 C.C.E.L. (2d) 157, and Gillman v. Saan Stores Ltd. (1992) 45 C.C.E.L. 9 (Alta. Q.B.)

38. Wallace, supra note 1, at para 104

39. Wallace, supra at para 127

40. Ibid, at para 136

41. Wallace, supra at para 138-9

42. Ibid, supra at para 141; McLachlan, J., cites Carrick v. Cooper Canada Ltd. (1983) 2 C.C.E.L. 87 (Ont.H.C.); Bernardin v. Alitalia AirLines (1993) 50 C.C.E.L. 156 at pp. 162-3. Regarding the reasonable exercise of discretionary powers by the employer. Cohnstaldt v. University of Regina [1989] 1 S.C.R. 1011 at 1019, Greenberg v. Meffert (1985) 50 O.R. 755 (C.A.) at 764, Truckers Garage Inc. v. Krell (1993) 3 C.C.E.L. (2d) 157 (Ont.C.A.) at 164

43. See Ball, Stacey Reginald. "Bad Faith Discharge" (1994) 39 McGill L.J. 568; Christie, Innis, Geoffrey England and Brent Cotter, Employment Law in Canada, 2^nd ed. Toronto: Butterworths, 1993, p.750; Schai, Randall B. "Aggravated Damages and the Employment Contract" 1991) 55 Sask. L. Rev 345 at 363; England, Geoffrey, "Recent Developments in the Law of Employment Contract: Continuing Tension Between the Rights and Paradigm and the Efficiency Paradigin" (1995), 20 Queens L.J. 557.

44. Wallace, supra, note 1, at para 145. See S.K. O'Byrne "Good Faith in Contractual Performance: Recent Developments" (1995); 74 Can.BarRev. 70. Under the civil law of Quebec the court has implied a contractual term of good faith and fair dealing in Houle v. Canadian National Bank [1990] 3 S.C.R. 122

45. Wallace, supra, note 1, at para 146.

46. Wallace, (S.C.C.) at para 148.

47. Wallace (C.A.) para 103.

48. Wallace (S.C.C.) para 75.

49. Wallace (S.C.C.) para 77.

50. Simpson v. Consumer's Association of Canada (1999) 41 C.C.E.L. (2d) 179, (Ont.Ct.G.D.); Baranowski v. Binks Manufacturing Co (2000) 49 C.C.E.L. (2d) 170 (Ont.S.C.J.)

51. Francis v. Canadian Imperial Bank of Commerce

52. Francis, supra note (1994) 21 O.R. (3d) 75

53. Williams v. Mororola Ltd. (1998) 38 C.C.E.L. (2d) 76; Lukowski v. Hatch Associates Ltd. (1998) 39 C.C.E.L. (2d) 177.

54. Ben David v. Congregation B'Nai Israel [1999] O.J. No. 1238.

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Michael F. Smith


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