Labor & Employment Law

Unpacking Keays v. Honda - Part III

By Michael Fitzgibbon

This post deals with those aspects of the Keays case that deal with so-called Wallace damages.  Thought I have dealt with Wallace damages numerous times on this blog and elsewhere, following the Keays case those comments should be taken with a grain of salt.

The Court took the occasion to, in effect, revisit Wallace-damages and, in so doing, dealt a significant blow to plaintiffs who advance these claims.  The Court felt that this re-assessment was necessary in light of its recent decision in Fidler v. Sun Life Assurance Co. of Canada.

Wallace established that the employer had an obligation not to act in bad faith towards the employee at the point of discharge. Where it was found that the employer acted in bad faith, courts in common law provinces would extend the period of notice by some amount (this is sometimes known as the ?Wallace bump?).

In analyzing Wallace damages, the Court went back to the 1854 case of Hadley v. Baxendale where it was held that damages are recoverable for a contractual breach if the damages are ?such as may fairly and reasonably be considered either arising naturally... from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties.?

The first question, then, when dealing with an employment case is: what did the parties contemplate at the time of the formation of the contract?

The Court held that:

At the time the contract was formed, there would not ordinarily be contemplation of psychological damage resulting from the dismissal since the dismissal is a clear legal possibility. The normal distress and hurt feelings resulting from dismissal are not compensable. The Court then affirmed that in the employment law context, damages resulting from the manner of dismissal will be available if they result from the circumstances described in Wallace, namely where the employer engages in conduct during the course of dismissal that is ?unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive?. In other words it would have been in the contemplation of the parties at the time the contract was formed for damages to result when the circumstances described in Wallace are present. It would be both foreseeable and compensable.

But how would this be compensated? Since the release of Wallace in 1997 common law judges have compensated employees for bad faith conduct of the employer through an extension of the period of reasonable notice. The Court determined that this approach was incorrect. Mr. Justice Bastarache held:

?.. if the employee can prove that the manner of dismissal caused mental distress that was in the contemplation of the parties, those damages will be awarded not through an arbitrary extension of the notice period, but through an award that reflects the actual damages. Examples of conduct in dismissal resulting in compensable damages are attacking the employee?s reputation by declarations made at the time of dismissal, misrepresentation regarding the reason for the decision, or dismissal meant to deprive the employee of a pension benefit or other right, permanent status for instance.

In other words, the Court will have to come up with an actual number reflecting the damages that the employee suffered, if any, by reason of the ?bad faith? conduct of the employer.

This methodology should limit the circumstances in which damages formerly known as Wallace-damages will be awarded.

This is welcome as Wallace claims have, since 1997, Wallace claims have been advanced in a whole range of circumstances where they had little, if any chance of success.  Though so-called specious Wallace claims had been criticized in the past in a number of cases (for example, see this discussion and Yanez) the Supeme Court's treatment of Wallace should serve to limit these claims to the most exceptional circumstances and then only where damages can be assessed under Hadley principles. 

Again, as was observed by Mr. Justice Iaccobuci in Wallace these are not "automatic claims .. in every case of dismissal."  As with punitive damages, these are exceptional claims. 

Full post as published by Thoughts from a Management Lawyer on July 02, 2008 (boomark / email).