CH-21-22 Terminating the Employment Relationship – Canadian Business and the Law : Book Guide

This Document Contains Chapters 21 to 22 Chapter 21 Terminating the Employment Relationship Instructor’s Manual—Answers by Dorothy DuPlessis V. CHAPTER STUDY Questions for Review, page 562 1. In what circumstances may an employee be terminated? Answer: An employee may be terminated without any notice if there is just cause, subject to an agreement to the contrary. An employee may also be terminated by the employer giving reasonable notice of termination, or pay in lieu of notice, subject to an agreement to the contrary. 2. What is meant by “just cause?” Answer: Just cause means that a fundamental term of the employment contract has been breached. It exists when the employee is guilty of serious misconduct, habitual neglect of duty, incompetence, conduct incompatible with duties or prejudicial to the employer’s business, or willful disobedience in a matter of substance. 3. What is a progressive discipline policy? How does a progressive discipline policy affect the termination of employees? Answer: A progressive discipline policy is a system that follows a sequence of employee discipline from less to more severe punishment. It means that employer must apply other penalties before dismissal. The employee should be advised not just about the unacceptable conduct but also about the consequences of failure to improve. 4. When does incompetence amount to just cause for dismissal? Answer: To justify dismissal for incompetence, an employer must be more than merely dissatisfied with the employee’s work. An employee would need to exhibit a lack of ability, knowledge, or qualification to perform employment obligations. 5. An employer may dismiss an employee for cause when the employee’s conduct is prejudicial to the employer’s business. Give an example of conduct that is prejudicial to the employer’s business. Answer: Accepting lavish and inappropriate gifts from the employer’s clients is an example of conduct that is prejudicial to the employer’s business. The conduct complained of is not limited to conduct on the job; it can also apply to conduct outside working hours. For example, a school board was justified in dismissing a school superintendent who was convicted of a petty fraud outside the performance of his duties. 6. In the absence of just cause, how much notice of termination must an employee be given? Answer: For employees hired for a finite period, their contracts end without notice when the contract term expires. For employees hired for indefinite terms, the period of notice required to terminate their contracts would be either the period agreed on in the employment contract, the period specified in employment standards legislation, or reasonable notice. 7. In the absence of just cause, how much notice of termination must a superior-performing employee be given? Answer: A superior-performing employee probably has no greater argument for a longer period of notice than any other employee. Notice is based on well-established factors under common law; superior performance is not one of those. 8. How is reasonable notice calculated? Answer: Reasonable notice is generally calculated by considering character of employment, length of service, age, and availability of similar employment. Other factors include specialization, inducement, company policy, industry practice, personal characteristics, and economic climate. 9. In the calculation of reasonable notice, which factor is the most important? Explain. Answer: The weight to be given to each factor is uncertain. 10. In general, a longer-term employee is entitled to more notice than a shorter-term employee. What is the rationale for this distinction? Answer: The rationale is that a long-serving employee does not have the same degree or breadth of experience as an employee who has had several shorter-term jobs. In essence, a long-serving employee has a smaller range of comparable re-employment prospects. 11. What is constructive dismissal? Give an example. Answer: Constructive dismissal occurs when an employer changes a fundamental term of an employment contract without the consent of the employee. An example would be a demotion or a decrease in salary. 12. How can a wrongful dismissal suit arise? Name three ways. Answer: A wrongful dismissal suit may arise when an employee has been dismissed for cause and the employee claims there was no just cause or when an employee is given notice of dismissal and the employee claims the notice was inadequate. A wrongful dismissal suit can also arise from a constructive dismissal. 13. Why is the manner of termination important? Answer: An employer who conducts a dismissal in a harsh manner may be vulnerable to additional damages beyond those required for reasonable notice. 14. When is a successful litigant entitled to punitive damages? Explain. Answer: These will be awarded only when the damages arise from a separate, actionable wrong, such as deceit, breach of fiduciary duty, abuse of power, or defamation. These damages are generally awarded only in very exceptional circumstances. They are there to punish the accused rather than to simply right a wrong. 15. What is the duty to mitigate? When does it arise? Answer: The duty to mitigate is the duty to act to lessen damages. The duty arises when a contract has been breached, that is, when an employee has been fired or constructively dismissed. 16. What should a termination settlement contain? Answer: A termination settlement should address all outstanding issues between an employer and an employee, that is, the amount of severance, continuing benefits, and so on. As well, it should contain a release. 17. How does the process for termination differ between the union and non-union sectors? Answer: In the unionized sector, termination is governed by the collective agreement. This agreement specifies a grievance and an arbitration process to address any complaints about termination. 18. What is the grievance process? When is it used? Answer: The grievance process is a procedure for resolving disputes contained in union contracts. Regardless of the individual content of collective agreements, disputes about their interpretation, administration, or application are required to be submitted to a grievance process. Questions for Critical Thinking, page 563 1. On occasion, employers and employees have argued for a rule of thumb in calculating reasonable notice. Most frequently, they have argued for a “month-per-year-of-service” rule. Courts have generally rejected such an approach. What are the advantages of such a rule? How is such a rule defective? Answer: A rule of thumb, such as a “month-per-year-of-service,” introduces a degree of certainty and predictability, which employees and employers may welcome. Knowing the amount of notice entitlement in advance may avoid arguments and lawsuits over the appropriate amount of notice. Courts have often held that the “rule of thumb” approach is deficient and inappropriate because it puts undue emphasis on one of the Bardal factors at the expense of the others. It introduces a measure of rigidity into an exercise that should be fluid and has regard for the particular circumstances. It does not take into consideration all the variables the affect an employee’s ability to obtain alternative employment. See: Michael Fitzgibbon, “Determining the period of reasonable notice of termination,” Addendum (April 2006) The Canadian Bar Association at http://www.cba.org/CBA/newsletters/addendum04-06/news.aspx. 2. With the abolition of mandatory retirement, more people will work past the traditional retirement ages of 60 to 65. When there was mandatory retirement, employers often ignored performance issues with older employees because they would soon retire. With the abolition of mandatory retirement, employers will have to deal with aging workers who may not be able to keep up with the evolving demands of their occupations or companies. How should employers manage this challenge? What is the risk for employers who require older employees to acquire new skills? Answer: Employers need to engage in performance management. This involves monitoring and documenting lagging performance of older employees so that the employer can institute performance improvement measures, providing incentives for voluntary retirement, and make it easier for those who want to ease out slowly through reduced hours, flexitime arrangements, or rehiring former employees on a contract basis. Employers need to be careful not to just target older employees for more rigorous performance management and monitoring or they risk a charge of discrimination. A further option available to employers is a retirement agreement that confirms a fixed date of retirement. Provided such agreements are truly voluntary; do not attempt to abrogate employment standards, labour codes, or human rights; and real consideration flows to the employee, they are likely to be enforceable. The performance management of older workers raises some interesting legal questions. If a worker’s performance is lagging because he is not competent, then that can trigger performance improvement measures and, in extreme situations, grounds for dismissal. However, if the lower productivity is the result of age, disability, or illness, this triggers legal obligations on the employer to accommodate the employee to the point of undue hardship. The other risk for employers is that unilateral changes to the employment relationship, such as changes to title, work responsibility, or hours of work, may trigger constructive dismissal. In Fisher v Lakeland Mills Ltd (2008), 77 BCLR (4th) 13 (BC CA), the British Columbia Court of Appeal awarded constructive dismissal damages to a 66-year-old employee who felt pressured to retire because she could not master the new computer skills demanded by her employer. The demand to acquire these skills to handle additional shipping duties was a fundamental change to her secretarial and accounting job that the employer was not entitled to impose unilaterally. It is important that employers document in writing the employee’s agreement to changes, preferably in the retirement agreement. Sources: Nicole Byres, “Retirement agreements may signify next frontier in employment contracts,” The Lawyers Weekly (29 February 2008) 9; Cristin Schmitz, “Senior’s forced retirement found to be constructive dismissal by B.C.’s top court,” The Lawyers Weekly (15 February 2008) 1; Virginia Galt, “The end of mandatory retirement: Now what?” The Globe and Mail (9 December 2006) B12. 3. Social media has become part of most people’s lives. Many employees have a Facebook or LinkedIn account. Others post comments, pictures, and video on Twitter, YouTube, or Flickr. Still others keep a personal blog. What are the risks to the employer of employees using social media at work or at home? Should an employee’s social media conduct be grounds for termination? Explain. How can employers reduce the risks posed by social media use by employees? Answer: “The risks to the employer of employees using social media at work or at home include: loss of productivity at work; creation of a poisoned work environment when employee accesses or creates and distributes inappropriate content; leaks of confidential or proprietary information; damage to an employer’s reputation by criticism or derogatory comments about the employer or its clients.” As noted in the Technology and Law: The Facebook Firings box (page 542), activity on social media may be grounds for termination of employment. Illegitimate and abusive use of social media whether at the workplace or outside may lead to termination. An employer can reduce the risks posed by social media by creating policies that address the use of social media, providing education and training, enforcing their policies, and identifying and taking steps to insulate high-risk employees before problems arise. Source: Pablo Guzman and Tatha Swann, “‘You are what you tweet’: Perks and perils of social media,” Employment & Labour Conference (Toronto: 2013), online: Davis LLP . 4. The Supreme Court of Canada has indicated that in some circumstances, it is necessary for a dismissed employee to mitigate her damages by returning to work for the same employer. In what circumstances do you think a terminated employee should be required to return to work for her ex-employer? Do you see any problems for the terminated employee and the employer with the employee returning to work? [footnote deleted] Answer: In Evans v Teamsters Local Union No 31, 2008 SCC 20, [2008] 1 SCR 661, the Supreme Court held that employees who have been wrongfully dismissed by their employer are required to mitigate their damages by returning to work for the same employer who terminated their employment under certain conditions. The court held that a reasonable person would accept an opportunity of re-employment if • the salary offered is the same • the working conditions are not substantially different or the work more demanding • the personal relationships involved are not acrimonious • the offer to return to work is for the reasonable notice period The problem with returning to work is that it is difficult for a person to return to work for a boss who fired him. The Supreme Court, however, stressed that an employee would not have to return to a poisonous work environment. The other problem with returning to work is the difficulty in finding alternative employment during the working notice period. Presumably, the employer must provide the employee with a reasonable opportunity to do so; otherwise, the purpose of notice is defeated. There is much debate about the significance of this case. Some, like Toronto lawyer Howard Levitt, suggest that this case is simply an application of the principle that employers have always been allowed to force dismissed employees back to the job to work out their notice period to mitigate damages (they just rarely do so). Others suggest that the case signals a change in employment law that favours the employer. As Mr. Evans’ lawyer, Eugene Meechan, stated, “employers can henceforth fire a worker and ‘strategically’ offer him or her another job a short while later—after the worker has suffered so much humiliation and alienation that returning to work would be a near impossibility. It gives employers a bait-and-switch tactic they didn’t have.” Sources: Kirk Makin, “Take return-to-work offer or forfeit severance pay, Supreme Court rules,” The Globe and Mail (2 May 2008) A4; Janice Tibbetts, “Fired employee must work out notice period, Supreme Court rules,” Edmonton Journal (18 May 2008) A14. 5. In Honda Canada Inc v Keays, the Supreme Court of Canada stated that if an employee can prove the manner of dismissal caused mental stress that was in the contemplation of the parties (mental distress over and above the normal impact of termination), the damages should be awarded through an award that reflects the actual damages, not through an arbitrary extension of the notice period. Is this approach beneficial to employees? Explain. Answer: The Wallace case emphasizes the importance of the manner of dismissal. If an employer acts harshly, he or she may ultimately pay in a wrongful dismissal suit. The length of notice will be increased to reflect the harsh behaviour. There have been many decisions applying Wallace, and the factors, which have led to increased notice periods, include • failing to conduct a proper investigation before termination • not providing an employee with an opportunity to explain his or her version of events • disseminating false and damaging information about the employee to co-workers or customers • conducting the dismissal insensitively • not being candid and truthful with the employee • withholding statutory severance • being insensitive about the timing of the termination • escorting an employee out of the door Such factors as these have increased the damage awards by as little as 10 percent to as much as 150 percent. The average tends to be about 33 percent. (Source: Howard Levitt, “Wrongful dismissal suits gather force,” The National Post (15 February 1999) D8.) Honda v Keays changes the manner of compensation for breaches of the duty of good faith when dismissing employees. Now, the wrongfully dismissed employee who has been treated harshly will have to prove that the employer’s behaviour actually caused mental stress. This is not good news for employees as trial courts have tended to hand out Wallace damages on a regular basis because employees did not have to prove actual damages. Now that employees will have to prove that they suffered actual damages as a result of the employer’s behaviour, it is likely that there will be fewer awards of damages for bad faith. In addition, rather than having the notice period extended, the reward will reflect the actual damages suffered. This may result in a larger or smaller award for an employee who has suffered mental distress as a result of the manner of dismissal. The method of calculating damages is good for employees as the award will reflect actual damages, but the Wallace method of calculating damages did not require any proof. Source: Stuart Rudener, “The damages formerly known as Wallace,” The Lawyers Weekly (5 September 2008) 7. 6. Office romances are exceedingly common. The long hours that co-workers often spend together coupled with minimal social contact outside the job can create the ideal conditions for love to flourish. What are the risks of office romances for employees? What are the risks for employers? Should companies have policies regarding workplace romances? If so, what should such a policy contain? Answer: Risks for employees: there are no laws against office romance. However, if a company has a strict policy against office romance, then fraternization may be grounds for dismissal. In the absence of a policy there are still risks. If the employees engage in questionable behaviour, such as giving promotions and other benefits to their partner or sharing confidential information about company policy or other staff during “pillow talk,” this can be grounds for dismissal. If, however, the liaisons are welcome and do not harm the company, they do not generally constitute just cause for dismissal. Risks for employers: the biggest fear for an employer is the possibility of an ugly sexual harassment lawsuit, particularly when the affair is between a junior and a senior employee. At the end of an affair, one party may allege sexual harassment or discrimination. If proven, the employer faces liability because, under human rights legislation, an employer is liable for sexual harassment that occurs in the workplace. It is also important to note that consensual liaisons can result in lawsuits. For example in Simpson v Consumers’ Association of Canada (2001), 209 DLR (4th) 213 (Ont CA), the Ontario Court of Appeal ruled that consensual contact is not necessarily welcome and may constitute harassment if the junior employee believes his or her job is at stake. Another major concern is that one of the employees may receive preferential treatment if the other is in a position to bestow benefits and, conversely, benefits may be withheld at the end of the affair. Even if there is no impropriety, it may affect workplace morale because other employees are going to wonder if someone is receiving preferential treatment because of a relationship. Fraternization policies: some employers do have policies regarding workplace love but many more do not. Most employers recognize that given the long hours spent at work, late nights, business travel, and emphasis on teamwork, it is inevitable that romance will blossom. Those that do have policies do not usually ban romances but manage them. Often, if one employee is in a position of authority over the other, one of the two will have to move to a different division, location, office, or such. Also, some policies require the parties to reveal the affair to someone in the organization—a human resource person, for example—to ensure there is no conflict of interest. The benefit of a policy is that it clarifies the employer’s expectations and defines what correct or incorrect behaviour in the workplace is. Sources: Virginia Galt, “Cupid’s in the office. You might want to think twice,” The Globe and Mail (12 May 2007) B19; Jill Mahoney, “Cubicle cupid: Laws and companies grey on office romance,” The Globe and Mail (8 October 2005) F7. Situations for Discussion, page 563 1. Rhianne Dolman was an insurance adjuster who had worked for Dillman Adjusters for eight years. Her annual salary with Dillman was $60 000. Groger Adjusters persuaded Rhianne to work for it at a salary of $75 000 per year. Rhianne agreed and signed an employment contract. Several days later, Groger asked her to sign a non-solicitation agreement. Rhianne agreed. Three months later, Rhianne was having lunch with some colleagues when Rhianne asked one of them if he would be interested in opening an adjusting business to compete with Groger. She also asked another employee if, hypothetically, he would like to work for her someday in the adjusting business. The conversation was overheard by another employee of Groger, who informed senior management. Rhianne’s employment was terminated immediately. Did Groger have just cause to terminate Rhianne? What is the effect of the non-solicitation clause? If Groger does not have just cause to terminate Rhianne, to how much notice is she entitled? [footnote deleted] Answer: This situation is based in part on Alisha v JD Collins Fire Protection Co, [2006] OJ No 4634, 55 CCEL (3d) 116 (SC). The job position of the plaintiff and the business of the defendant have been changed, and salary figures have been added. The court held that the plaintiff’s hypothetical comments to the other employee were nonchalant, did not include any terms of employment, and did not amount to an offer to join the plaintiff’s company. The plaintiff had no supervisory responsibilities and no discretionary power to make contractual decisions, and there was no evidence that defendant suffered financial loss. A long-term plan to own a business and engaging in vague discussions about the business with fellow employees did not constitute breach of good faith obligations. The non-solicitation agreement was void. The plaintiff’s behaviour did not warrant summary dismissal. The plaintiff was induced to leave secure, long-term employment after eight years and should be treated as a long-term secure employee of eight years. The plaintiff was entitled to five months’ notice of termination. (end of case summary) As noted in the case summary, it is unlikely that Groger has just cause to terminate Rhianne without notice. As an employee, she has a duty of good faith to her employer. It is not, however, a breach of an employee’s duty of good faith to search for alternative job opportunities, to negotiate with a competitor, or to talk to co-workers about her intentions. However, if she were to orchestrate the mass exodus of employees like the manager in RBC Dominion Securities v Merrill Lynch Canada Inc, 2008 SCC 54, [2008] 3 SCR 79, she would be in breach of her implied duty of good faith. If she guilty of that behaviour, then there would be just cause to dismiss her based on conduct incompatible with her duties and the employer’s interests. The non-solicitation clause can affect her ability to compete with her former employer but as the agreement was signed after the employment contract was entered into, it is likely void for lack of consideration. It can also be void if it is unreasonable. If Rhianne was a fiduciary, she would have fiduciary obligations not to compete with her former employer for a period of time. However, as an insurance adjuster, it is unlikely that she is a fiduciary. She does not have the indices of a fiduciary and therefore would be free to compete with her former employer or work for a competitor. Rhianne’s notice period is determined by the factors in Bardal: age, length of service, character of employment, and availability of suitable employment. In addition, she was persuaded to work for Groger, leaving secure employment with Dillman. Although a few courts have said that the circumstances of hiring are irrelevant to setting the notice period, many more have said an employer’s promises to a potential employee of a better job, more money, and a secure future are inducement factors that are considered in the calculation of notice. 2. Debbie Hull, a licensed customs broker was employed by Hercules Forward Inc. After about two years, she was promoted to manager of the customs department and became responsible for supervising two employees. Not all went well in the department under Hull’s supervision. The employees who reported to Hull did not take criticism very well and as a result, she was often at odds with them. Despite this animosity, she and her two employees often got together and used emails to criticize and belittle other employees at Hercules. Matters, however, came to a boiling point when, after returning from an appointment, she was ignored by the employee who filled in during her absence. Hull responded by swearing at her and threatening her with termination. When Hull tried to suspend the employee, she was overruled by her boss. Feeling betrayed and unable to discipline her staff, Hull left the workplace. A few days later, Hull sent a letter to Hercules complaining that the workplace was poisonous and that she would be unable to return unless the employee who had ignored her was dismissed. Hercules interpreted Hull’s letter as a resignation. Hull sued for wrongful dismissal. Has Hull been wrongfully dismissed? Explain. [footnote deleted] Answer: This situation is based on Danielisz v Hercules Forwarding Inc., 2012 BCSC 1155 (CanLII) and the above facts are a serviceable summary of the case. The key issue is whether the poor relations among the staff constituted a poisonous working environment that resulted in the constructive dismissal of the employee or whether the employee had resigned from her position. It is a fundamental implied term of an employment contract that an employer will treat the employee with civility, decency, respect, and dignity. If an employer subjects an employee to treatment that renders performance of their work impossible or continued employment intolerable then the employer has constructively dismissed the employee. The court found that that the employee was not constructively dismissed. Although there were interpersonal conflicts and the employee encountered some criticism from those whom she worked, it was not such that it rendered continued employment impossible. Further, the employee herself played a significant role in fanning the flames of discontent in the office. The court stated: “...the plaintiff was the author of her own misfortune in terms of her experience of a negative atmosphere in the workplace. Despite her role as a manager she actively participated in, and sometimes initiated communications that were designed to increase the dissension and conflict among the upstairs staff” As she was often the origin of the workplace discord, she was in no position to demand that the employer fire another employee as a condition to returning to work. By issuing the ultimatum, the employer may treat this action as insubordination and a resignation. See: Daniel Lublin, “Remember who calls the legal shots at work,” The Globe and Mail (26 October 2012) B16. 3. Margaret Brien, aged 51 was terminated from her job as office manager at Niagara Motors Limited, a car dealership after 23 years. Her termination came as a complete surprise to her as she had never been disciplined and had not received any warnings about her performance. At the time of her termination, the dealership told Brien that she was being terminated because her position was being eliminated. This was not correct. The dealership had secretly advertised her position and required Brien to train her replacement after her dismissal. She was offered eight weeks of pay in lieu of notice and 23 weeks of severance if she signed a release. Brien sued for wrongful dismissal. In response, the dealership alleged that Brien performed her duties incompetently and unprofessionally and that it had just cause for her termination. The dealership also refused to provide Brien with a letter of reference or to assist her in any way with her job search. Brien successfully sued Niagara Motors for wrongful dismissal. What would be reasonable notice in this situation? What factors will the court consider in an award for damages? How would the award of damages differ pre–Honda v Keays versus post–Honda v Keays? [footnote deleted] Answer: This scenario is based on Brien v Niagara Motors Limited, 2009 ONCA 887, 78 CCEL (3d) 10 and the above summary provides a serviceable account of the facts in that case. Based on a consideration of Brien’s age (51 years), years of service (23 years), and position in the company (office manager), the trial judge awarded a 24-month notice period. The period was upheld on appeal. This case provides the opportunity to discuss the factors the court considers in awarding damages in wrongful dismissal cases. In addition to reasonable notice (discussed above), the court may also award damages for the manner of dismissal if the employer breaches the duty of good faith. The employer breached the duty of good faith by alleging incompetency and unprofessional conduct after Brien commenced a court action, by being dishonest about the reasons for termination, and by failing to provide a reference letter. However, a breach of the duty is not sufficient to award damages. The employee must also show that the bad faith conduct in the manner of the dismissal caused actual loss or damage and that the loss was directly related to the manner of dismissal. In other words, there must be evidence—medical or professional—establishing a significant impact on the employee’s health caused by the manner of dismissal. The difference between an award of damages pre–Honda v Keays versus post–Honda v Keays is illustrated by the difference between the trial court decision and the appeal court decision. The trial decision is pre–Honda v Keays and the appeal is post–Honda v Keays. The trial judge concluded that the employer acted in bad faith in the manner of Brien’s dismissal, and pursuant to the Wallace principle increased the award of 24 months by two additional months. The appeal court affirmed that employees are entitled to claim mental distress damages that result from the employer’s bad faith conduct. However, the distress of Brien was not compensable as she did not seek any medical or professional help for it. No damages could be awarded and the additional two months of notice was set aside. Damages relating to the manner of dismissal must be proven, rather than adding an arbitrary number of months to the award in lieu of notice. The normal distress and hurt feelings are not compensable. See Steve Levitt, “How to win damages for bad faith conduct by employers,” The Lawyers Weekly (21 May 2010) 9. 4. Randal Martin joined International Maple Leaf Springs Water Corp. of Vancouver, B.C., in July 1994. He was hired to assist with the construction of a bottling plant at a spring near Chilliwack, B.C., and to develop markets in North America and Asia. He had been running a similar operation in Saskatchewan but left on the assurance that the B.C. company was viable and would be able to finance the new plant and fund the marketing initiatives. By March 1995, Martin had settled contracts with six companies and was close to three more, including a major deal with an American brewery that wanted to use its own brand name on Maple Leaf’s products. In April 1995, the company fired Martin accusing him of dishonesty and coming to work drunk. Maple Leaf alleged that Martin was dishonest in registering trade names belonging to the company. Martin had registered trade names personally, as Maple Leaf did not have the funds to do it itself. The president of Maple Leaf knew about Martin’s action and knew that the trade names would be transferred to the company as soon as Martin was repaid. There was no evidence of Martin coming to work drunk. Martin successfully sued for wrongful dismissal. What would be reasonable notice in this situation? What factors would the courts consider in awarding a period of notice? [footnote deleted] Answer: This scenario is based on Martin v International Maple Leaf Springs Water Corp, [1998] BCJ No 1663, 38 CCEL (2d) 128 (SC) and provides a serviceable account of the facts in that case. The calculation of reasonable notice depends on a number of factors: • age: plaintiff was 46 • availability of alternative employment: plaintiff was unable to find reasonable alternative employment • inducement: plaintiff was lured to B.C. from his home in Saskatchewan, where he had secure employment • length of service: nine months • position in company: senior operating and marketing position The plaintiff was awarded six months’ salary in lieu of notice. The inducement factor was a very influential factor. The case also involves an application of the Wallace case. The manner of dismissal, which was “high-handed and without objective basis,” entitled Martin to an additional three months’ notice. The false accusations of dishonesty amounted to slander. For this, Martin received punitive damages of $35 000. 5. Clyde Peters has worked as a senior systems analyst for 17 years at NJ Industries. He has a good work record and a positive image throughout the company. Recently, he came under the supervision of the new controller, John Baxter, who has quickly found himself dissatisfied with Peters’ performance. Baxter believes that Peters has failed to properly implement the company’s new computerized financial system. As well, he has failed to design a strategic plan for his department. These two matters have caused considerable problems between the two. Baxter is considering recommending Peters’ termination. How should the problem be resolved? Do grounds for termination exist? [footnote deleted] Answer: This scenario is based on the following case: Russell v Nova Scotia Power (1996), 150 NSR (2d) 271, 436 APR 271 (SC). Peter Russell was a senior systems analyst at Nova Scotia Power for more than 15 years when he was dismissed, allegedly for cause, in March 1995. In 1993, Russell, who had a good work record and a positive image throughout the company, came under the supervision of Jay Forbes. Forbes alleged a number of deficiencies in relation to Russell’s work, including a failure to design a strategic plan for his department and poor performance with regard to the internal promotion and implementation of the company’s new computerized financial system. In the end, Russell was dismissed without notice. Subsequently, the company circulated an email to hundreds of employees stating in effect that Russell had been terminated for incompetence. The company had wanted to send a clear message to other employees of the consequences of unsatisfactory performance. Russell successfully sued for wrongful dismissal. The court held that Forbes had wrongly assigned the blame for the financial systems problems to Russell and his attempts to have Russell to develop a strategic plan were ill considered. Russell was entitled to 18 months’ notice, which was reduced to 12 months because he had found work after six months. The court also awarded $40 000 in aggravated damages for the email message, which caused Russell mental stress and aggravated a pre-existing anxiety disorder. (end of case summary) Baxter has a problem with Peters’ performance. As such, he needs to investigate what the causes are (e.g., Peters’ incompetence? problems with systems? personal problems? problems with other employees? any related matters?). Without knowing the cause or causes of problems, it is premature of Baxter to recommend termination. Employers have often invested considerable time and money in an employee’s development; therefore, termination is not necessarily the best option or the first one to consider, in any event. The Russell case highlights the importance of actually investigating the grounds for dismissal. As presented, the facts of the hypothetical do not establish grounds for dismissal—mere dissatisfaction is not grounds for dismissal without notice. An employer would need to establish incompetence that would involve such matters as establishing performance standards, giving warnings, and documenting inadequacies. Absent such steps, the company is not justified in dismissing without notice. 6. Sandra Sigouin had worked at a Montreal branch of the National Bank for 20 years before being promoted to the position of special loans administrative officer. She was given the post even though she lacked the proper qualifications and training. The new job went badly. Sigouin made many mistakes, and the bank warned her in writing that if she did not improve, she would be terminated. She asked to take courses and promised to improve, but no further training was provided. A few months later, she was fired for incompetence after failing to renew a letter of credit. The mistake cost the bank $850 000. What should Sigouin do? Do you think the bank had grounds to terminate Sigouin for just cause? Do you think the bank acted fairly? Should an employer be permitted to promote an employee to her level of incompetence and then fire her for incompetence? What are the risks for an employer that uses such a tactic? [footnote deleted] Answer: As Sigouin was fired for alleged “incompetence,” she should consider suing the National Bank for wrongful dismissal. The employer probably does not have grounds for dismissal as the courts require a lot of proof to uphold dismissals for incompetence. Also, an employee’s incompetence must be examined in the context of a person’s entire employment record and the kind of support the employer gave to the employee to help her succeed. The Supreme Court of Canada has indicated that firing should only be used in cases of serious misconduct. The bank did not act fairly. The employee’s problems were due in large measure to the bank’s poor decisions: promoting an individual who is not qualified and failing to provide training. It is unfair to fire her when the bank is largely at fault. An employer who promotes an employee to her level of incompetence and then fires her for incompetence is unlikely to succeed if challenged for the reasons mentioned above (i.e., it is very difficult to prove incompetence). And, of course, an employer must consider the message it is sending to other employees—few employees would probably take the risk of applying for promotions knowing that dismissal could follow if they did not perform well in the new job. Source: Paul Waldie, “Federal Court rules against placing employees in a Catch-22 situation,” The Globe and Mail (17 April 2008) A3. 7. Don Smith worked at a call centre as an accounts payable specialist for nine years. During a two month period, Smith received over a dozen pornographic emails from a friend. The pornography was legal adult pornography. These emails were not solicited, however, Smith did not tell his friend to stop sending them. When he received the emails, Smith either deleted them or sent them to his home email account. He did not share them with anyone at work. The employer became aware of the emails through its network monitoring system. Smith was immediately dismissed for cause on the basis that he breached company policy set out in the employee handbook. The policy prohibited “accessing, receiving or storing any information that is discriminatory, profane, harassing or defamatory in any way (e.g. sexually-explicit or racially discriminatory material).” Smith had no previous record of misconduct or disciplinary action. Smith sued his employer for wrongful dismissal. Is he likely to be successful? What factors will the court consider in determining whether Smith was wrongfully dismissed? [footnote deleted] Answer: This situation is based on Asurion Canada Inc. v Brown and Cormier, 2013 NBCA 13 (CanLII) and the above facts are a serviceable summary. The Supreme Court of Canada in McKinley v B.C. Tel held that conduct of an employee must be judged in the context. The New Brunswick Court of Appeal found that the employee’s behavior did not warrant termination for just cause. The court noted: • The employee had a lengthy and unblemished employment record; • The emails were unsolicited; • The employee was forthright when confronted about the emails; • The employee did not disseminate the emails within the workplace; • The images did not involve criminal conduct and were examples of “legal adult pornography”; • The workplace was a particularly sensitive or vulnerable one The employer argued that the employee’s conduct involved violation of a workplace policy that the employee had acknowledged and agreed to. The court found that the employee had not been clearly warned about the zero tolerance approach to pornography in the workplace and the employee’s acknowledgement of the policy did not constitute sufficient warning. The employer’s response to the violation of the workplace was not, in the circumstance, proportionate. See: Richard Skinulis, “Pornographic e-mails are not cause for sacking,” The Lawyers Weekly (15 March 2013) 2. 8. Terry Schimp, 25, worked as a bartender for RCR Catering and Pubs. Although he was occasionally tardy, sometimes missed a staff meeting, and a few times was short on his cash, he was considered a productive employee. At the end of a private function that RCR was catering, one of Schimp’s supervisors noticed an open water bottle on his bar. He took a drink and discovered that it was vodka, not water. Suspecting that Schimp had stolen the vodka, the supervisor immediately fired Schimp. He was escorted off the premises in front of about 50 other staff members, and he was banned for six months from returning to the hotel premises where RCR’s offices were located. Schimp was extremely upset, but within a month he was able to get a new job with the same hourly rate of pay, only without tips. He sued for wrongful dismissal. At trial he was awarded $30 000 in damages. On appeal the damages were reduced to $10 000, of which approximately $7000 was compensation for the humiliation and degradation he suffered. Aside from the damage award, what costs did RCR incur as a result of this situation? How should RCR have acted differently? [footnote deleted] Answer: In addition to the damage award, RCR incurred legal fees in defending the action at trial and appealing the decision to the court of appeal. It was also responsible for a portion of Schimp’s legal fees as he was successful at both trial and on appeal. Note that Schimp received considerable damages even though he was able to get a job within a month at the same hourly rate. It was essentially the manner of dismissal that warranted the compensation. RCR may have suffered other less tangible costs, such as damage to its reputation and damage to staff morale. Employees are likely to be affected by the negative treatment of Schimp. He was not presumed innocent until proven guilty, he did not receive the benefit of a fair and impartial investigation into the allegations of theft, and he was dismissed in a public and humiliating manner. Howard Levitt, author of The Law of Dismissal in Canada and The Quick Reference to Employment Law suggests the following guidelines for dealing dismissals: • Avoid making rash decisions. • Afford employees the opportunity to explain their side of the story. • Thoroughly investigate allegations of misconduct. • Refrain from public terminations. • Resist the temptation of making an employee an example for others. • Be honest and upfront with the dismissed employee about the reasons for the termination. Source: Howard Levitt, “Why firing should be done with dignity,” The Financial Post (14 June 2004) FP11. Chapter 22 Professional Services Instructor’s Manual–Answers by Philip King and Steven Enman V. Chapter Study Questions for Review, page 582 1. Who is a professional? Answer: A professional is someone engaged in a self-governing occupation requiring the exercise of specialized knowledge, education, and skill. 2. What is the meaning of “fiduciary” in the context of professional–client relationships? Answer: Fiduciary duty is an obligation to act primarily in the interest of the person to whom a responsibility is owed because of the relationship between the two parties. It includes such elements as trust, confidence, and reliance. 3. How may professionals be in a conflict of interest? Answer: A professional can be engaged in a conflict of interest when the professional’s duty to act in the best interest of the client is inconsistent with the professional’s other profit-making activities. 4. What should a professional services contract contain? Answer: A professional services contract should contain the nature of the service being provided, the timeliness of the delivery, the way the service will be billed, and any other terms of importance to either party. 5. What are the options for setting professional fees? Answer: Fees can be charged by the hour, as a flat fee for the particular task, as a percentage of the value of the transaction, or on a contingency-fee basis. 6. What is a retainer? Answer: A retainer is an advance payment requested to fund services to be provided by a professional. 7. What is the basis for determining the cost of professional services if there is no formal contractual term addressing the issue? Answer: The principle of quantum meruit applies: where it is intended that a fee will be charged, the client is obliged to pay a reasonable amount for the service provided. 8. What are the three types of professional responsibility? Answer: The three types of professional responsibilities are in contract, tort, and fiduciary duties. 9. Why were accountants traditionally protected from third-party claims? Answer: There was a fear that extending liability too broadly would threaten the viability of professions by discouraging entry into such high-risk occupations. 10. How did the Supreme Court of Canada limit the duty of care for negligent misstatements in the Hercules decision? Answer: The Court held that defining the duty of care in negligence calls for a two-step enquiry: Step One: Is there a relationship of proximity between the parties? Are the parties neighbours? Is it reasonably foreseeable that carelessness by one party would adversely affect the other? If the answer to these questions is yes, then a duty of care is owed, subject to Step Two. Step Two: Are there any public policy considerations that should limit the duty owed or eliminate it entirely? Step Two is the vehicle for limiting the duty of care. 11. What is the meaning of “self-regulating profession”? Answer: A profession is self-regulating when legislation delegates to a professional body the authority to govern its members. 12. What is the key role of the bodies created to oversee the professions? Answer: The professional bodies regulate entry, set standards, and discipline members of the profession. The key role is to determine who is legally qualified to practise. 13. During a disciplinary process, why is it important to protect the rights of the professional against whom a complaint has been made? Answer: The professional is entitled to mount a full defence to the accusations because the outcome of the process can limit or eliminate the professional’s right to practise and harm the individual’s reputation. 14. What are LLPs? Answer: LLPs are limited liability partnerships organized pursuant to provincial legislation that limits the liability of individual partners. Generally, partners retain liability for their own negligence or that of persons whom they supervise, but they are not liable for the negligence of any other partners. 15. What rules establish who can be a member of a particular profession? Answer: The relevant professional body makes the membership rules based on its authority under the provincial legislation. 16. If a conflict between a professional’s ethical obligations to the profession and those to the client cannot be resolved, what must the professional do? Answer: Should members of the profession want to retain membership in the profession, their primary duties remain to that profession. When faced with a conflict, they will have to disengage themselves from the organization, or face disciplinary action from the profession for violating its rules. 17. What is a professional’s duty of confidentiality? Answer: The duty is the obligation of a professional not to disclose any information provided by the client without the client’s consent. 18. How does the duty of confidentiality differ from lawyer-client privilege? Answer: The duty of confidentiality is a general duty owed by a professional to her client. Lawyer-client privilege is the right of the client not to have communications with his lawyer divulged to a third party. Questions for Critical Thinking, page 583 1. The following is an excerpt from an auditor’s report: An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Is this description of an audit adequate for clients? Could it be written in such a way as to make the extent of their responsibilities clearer to users? [footnote deleted] Answer: These questions are designed for students who have some understanding of the audit function. They go to the heart of the “expectations gap”: the gap between what the public in general believes auditors do and what auditors in fact do. This expectations gap has fuelled much of the expansion of litigation against auditors. The report could explain more clearly exactly what auditors do and the basis on which their report is issued. The report above does this in accounting language, but not in a way that clients can easily understand. To test the existence of the expectations gap, ask students who are not accounting majors what the statement means to them. 2. If you are the manager in an organization responsible for finalizing contracts with professional service providers, what factors would you consider in deciding between fees based on an hourly basis versus a per-job basis? What protections might you try to build into the contracts? Answer: A per-job basis is more predictable and certain. When a professional charges by the hour, it is uncertain what the bill will be at the end of the job. In addition, when a professional, such as a lawyer or an accountant, is charging by the hour, the client may be reluctant to spend the necessary time with the professional to avoid a higher bill. This can be a disadvantage since the professional may not be able to properly perform the task if all the information is not provided. The manager could insert a cap on fees, even on an hourly basis, and also insert a clause allowing the renegotiation of the fees in certain situations. In addition, it is important that the contract is clear about what type of work will be performed and that the expectations are appropriate and reflected in the contract. 3. The Hercules decision was heavily criticized by some members of the business press as too lenient on auditors but was received with great relief by auditors. Did the Supreme Court of Canada define the purpose of the audit too narrowly? What is the appropriate balance between fairly compensating those who suffer loss and discouraging professionals from providing needed services? Answer: The focus of the criticism has been on the interpretation of the purpose of the audit as determined by the Supreme Court. This question can lead to an interesting debate among students who have some accounting background and those who do not. Students with an accounting background may see this as a good result. However, they should be challenged to think of the implications for the profession of the court’s adoption of a relatively narrow interpretation of the role of the audit. What about assurance for the financial markets? Non-accounting students can raise such issues as, Why should the auditor not be liable to investors? What assurance does an investor now have? This discussion can lead to questions about how else the Supreme Court (or a legislature) might have defined liability to avoid the concerns expressed in the Ultramares case (see textbook page 551), most of which are outlined in the Hercules decision itself. For example, what about greater emphasis on the reliance aspect of negligence? 4. In an economic downturn, investors often look to their investment advisors to explain their losses. Investors may claim that their advisors were more interested in their own fees and commissions than their clients’ portfolios or that their advisors failed to fully explain the degree of risk in their investments. Are investment advisors “professionals”? Do they owe their clients fiduciary duties? What standards should advisors be required to meet? Answer: These questions suggest an “expectations gap” similar to that involving auditors and clients. The common factor is potential misunderstanding regarding the advice and services provided to the client. Investment advisors may not be professionals in the classic sense of lawyers or accountants, but they are members of professional bodies. See, for example, the Investment Industry Regulatory Organization of Canada at http://www.iiroc.ca/Pages/default.aspx and the Financial Advisors Association of Canada at http://www.advocis.ca. In cases of alleged negligence or misconduct, these associations are influential in defining the standard of care that advisors are expected to meet. Whether advisors are in a fiduciary relationship with clients will depend on the application of Justice LaForest’s test in the Hodgkinson case on textbook page 575: Were the elements of trust, confidence, and reliance on skill, knowledge, and advice present in the relationship? If so, then advisors must provide full disclosure to clients of such matters as their remuneration from investment funds. Clients are entitled to be confident that advisors will recommend investments that are in clients’ best interest rather than those that provide the most revenue to the advisor. 5. Most professionals are required to maintain a minimum level of liability insurance in the event that claims are brought against them by those who rely on their advice. However, the cost of this insurance is passed on to clients through the fees they pay for services received. Does this system encourage professional responsibility? Is there a more effective method? Answer: Clients bear the cost of professional services through the fees that they pay whatever system is in place. The challenge for the profession is to ensure accountability by individual members so that those against whom claims are brought more frequently than others are required to pay higher premiums and that the public is made aware of any chronic substandard performance. 6. Professional organizations are authorized by legislation to regulate their own members in terms of controlling permission to practise, setting standards, and imposing discipline. Can the public expect to receive fair treatment from professional organizations that have a vested interest in protecting their own members? Answer: The answer depends on the degree to which the professional organizations want to appear accountable and thereby discourage the government from assuming direct control for their regulation. Organizations are becoming more accessible to the public and more transparent in their disciplinary processes in an effort to demonstrate their accountability to the public. See the Barrington case on textbook page 580. Situations for Discussion, page 584 1. Over the years of running a small business, Lan had acquired sizable savings. She wanted to get the best return on this money and discussed this with her lawyer, Harvey. He advised her that this was an excellent time to get into real estate; he had many clients who required financing. Lan could provide either first or second mortgages, depending on her desired level of risk and return. Harvey said he had some clients involved in a large townhouse development. Lan trusted him implicitly, as he had been her lawyer since she had first started her business. Thus, she lent the bulk of her savings—$200 000—as a second mortgage, which would earn interest at 19 percent per annum over five years. Within eight months the real estate market collapsed. The mortgagees defaulted on payment, and once the holders of the first mortgage had foreclosed, there was nothing left for Lan. When she complained to Harvey, he said that investments of any sort carry inherent risk. His personal investment company, for example, had been one of the partners in the townhouse development, and he too had lost his entire investment. Lan seeks advice about what she can do to recoup her losses. Identify Lan’s options. Answer: This case mirrors the facts in Hodgkinson v Simms (see textbook page 556), with the difference that the profession concerned is law rather than accounting. Lan has three possible bases of liability she could pursue, although her best chance is based on breach of fiduciary duty. Her claim in contract would be based on an implied term of the contract—that Harvey would disclose any non-arm’s-length interest in the investment scheme when giving advice—and that he violated that term. Harvey would deny this claim, arguing that Lan was solely interested in investment advice and she got exactly what she had requested. The claim based on breach of fiduciary responsibilities would depend on the nature of the relationship, specifically, whether Lan, when seeking advice, exhibited the elements of trust, confidence, and reliance on Harvey’s skill, knowledge, and advice as is required to establish the fiduciary relationship. If this was merely a business transaction, no such relationship would exist. In this case, Lan would argue that she indicated to Harvey her total reliance on his advice, that she sought him out as a trusted legal advisor of many years’ standing, and that she was dependent on his skill and knowledge. Further, she could point to the professional responsibilities (as outlined in the relevant law society code of conduct) as illustration of the minimum standard a court might apply. A lawyer must disclose any personal interest when giving advice. It is also questionable whether a lawyer should be giving investment advice at all. Such conduct is clearly beyond his area of professional expertise. Following the reasoning in Hodgkinson, it is probable that Lan would recover her losses. 2. Good Property engaged the services of a professional real estate appraisal firm, McGee and McGee, prior to purchasing a large tract of property on the outskirts of town. When Dan, the CFO of Good Property, first discussed the appraisal with Andy McGee, he said the appraisal was required by 10 January. Andy said this was impossible owing to other commitments and proposed 26 January. It was agreed that Andy would be the appraiser. Dan said he would get back to Andy about the date. The project was more complex than either Good Property or the appraisers expected. The local water conservation authority was about to issue a report that seriously affected the land, so Andy waited for it. The appraisal was not handed to Good Property until 29 January. By this time, another purchaser had acquired the property. When Dan was handed the sizable invoice for the work, he claimed that Andy had breached the contract by finishing the work late and had caused Dan to lose out on being able to buy the land. Furthermore, the invoice was far more than he expected to pay. How are these matters likely to be resolved? What arguments can Good Property and McGee raise? What would happen if McGee had not waited for the water report and Good Property had bought the land, which was later devalued by the report? Answer: The underlying problems here are deciding whether there was a contract, and if there was, what its terms were. Dan is not denying the existence of a contract, suggesting that both parties agree that one exists. An alternative approach for Dan could be to argue that there was no contract, based on the absence of acceptance of an offer or counteroffer. If there was a contract, what were the terms? Critical to the case is the completion date. Dan will argue that it was either 10 January or, at the very latest, 26 January (the date by which McGee had proposed completion). McGee will argue that there was no set date since Dan never agreed to 26 January and, as such, there was an implied term that the work would be completed as soon as possible or within a reasonable time. Of relevance is when the property was sold to a third party. If this date was before 26 January, Dan will want to rely on an earlier date for the agreed completion time. Alternatively, he will argue that a reasonably competent appraiser would have completed the task before that time. Of further concern is the amount to be paid. Since there does not appear to be any prior agreement, quantum meruit will apply, and Dan will be required to pay a reasonable amount for the work that was done. Dan may allege negligence as well as breach of contract. Dan will argue that it was McGee’s negligence that resulted in the task not being completed in a timely fashion. Dan can easily establish a duty of care, but the other elements of negligence may be problematic. Since the evidence suggests that external factors required additional time to be spent on the case and that Dan was the party pushing for inappropriate haste in the first place, it may be difficult to establish negligence. This case can be used to focus discussion on the need for clarity in entering into agreements with professional service providers. Time was crucial for Dan from the beginning. Why was the timing not settled by contract? Alternatively, if the desired date could not be met, why did Dan hire McGee? Price also remained unsettled. A mechanism should have been included in the contract for establishing an appropriate fee for service. In the situation where the land was devalued by the damaging report, the primary issues concern negligence, although Good Properties might also argue breach of an implied term in the contract to provide a competent appraisal. A duty of care was owed since a contract existed between the two parties. The key elements will be whether McGee met the standard of care, whether Good Properties used and relied on the appraisal for making its decision, and whether this reliance caused the loss. The value of this situation comes from the need for students to address elements beyond the duty of care, since these sometimes get overlooked in the discussion of professional negligence. 3. Maxine is a highly respected pharmacist and operates her own small pharmacy business in Alberta. For several years, Maxine has provided customers with a loyalty card, which accumulates points for each prescription or service purchased, ultimately enabling the holder to use the points to purchase other merchandise and obtain discounts. Recently, the Alberta College of Pharmacists has introduced legislation to prohibit pharmacists from offering incentives for purchasing pharmacy drugs, including loyalty and rewards programs. The College says that such incentives create conflicts of interest and are unprofessional. But critics of the new rule, such as the grocer Sobeys, say that studies have shown that such loyalty programs build the relationship between pharmacies and their patients, and encourage better use of medications. Many seniors and disabled people rely on loyalty and incentive programs to purchase items that they might not otherwise be able to afford. Is prohibiting loyalty and incentive programs for the purchase of prescription drugs a good idea? Does it protect the public? What are Maxine’s options if she is opposed to the rule? [footnote deleted] Answer: There is a strong public policy argument in favour of ensuring that pharmacists act in the best interests of patients, without conflicts of interest or perceived conflicts of interest. Decisions as to which drugs to recommend, and which drugs to take, should be based solely on the needs of patients and should be made objectively. On the other hand, loyalty programs may help build a stronger relationship between patients and pharmacies, thus enabling pharmacists to provide better care and more informed recommendations. In addition, there is the practical issue that drugs can be very expensive and, thus, anything that helps patients afford their medications is in the best interests of the patients. Students should be able to understand that there are good arguments on both sides of this issue. If Maxine is opposed to the rule, she can take the College to court and challenge their authority to enact such a rule. The court will have to decide whether the College has the legal authority to enact and enforce the rule. There are probably other pharmacists who oppose the rule, in which case Maxine may be able to join forces with them in opposing the rule. Taking action as a group may be more effective and would almost certainly be more economical. 4. Sino-Forest Corp. is an international forestry company. Between 2007 and 2011, the company raised $2.7 billion in the capital markets. In June 2011, allegations were made that Sino-Forest’s forest holdings in China and other countries were grossly and fraudulently overstated. The share price plummeted from $26 to $1 and then the company applied for bankruptcy protection in Canada. Investors have sued the company, its executives and directors, its auditors Ernst & Young, and a number of investment banks who acted as underwriters, for $9.18 billion in a class action lawsuit. The allegations against Ernst & Young consist of negligence in the audits, which should have detected the overstatement of holdings and objections to the presence on the Sino-Forest board of directors of former Ernst & Young partners. In 2013, an Ontario court approved a $117 million settlement in the case against Sino-Forest’s auditors Ernst & Young. The auditing firm did not admit liability as part of the settlement agreement. Ernst & Young still faces allegations from the Ontario Securities Commission that it exercised a lack of diligence in regard to its audit of Sino-Forest. Would the investors have been successful against Ernst & Young if they had proceeded to trial? What must the claimants have been able to prove in order to establish Ernst & Young’s liability? If the forest holdings were overstated as alleged, should the audits have revealed the problem? [footnote deleted] Answer: In order to be successful against Ernst & Young at trial, the investors would have had to establish the five requirements for proof of negligent misrepresentation (as listed on textbook page 573). Of particular importance will be the need to establish that Ernst & Young owed the investors a duty of care. This could be difficult, given the ruling in the Hercules Managements case. In particular, Step Two of the two-step process outlined in that case will present a challenge for the investors. The investors would also have to prove that Ernst & Young did not conduct their audits as reasonably competent auditors. It is difficult to say whether the audits should have revealed the overstatement of the forest holdings. In a trial, expert opinions from the auditing profession would be crucial. Regarding the presence on the board of directors of former Ernst & Young partners, the legal issue relates to conflict of interest. It is not a matter of proper disclosure, since the membership of the board is public knowledge. What matters is whether the firm could reasonably provide an independent audit in the circumstances. 5. Yul is a CGA working as comptroller for Jones Manufacturing. He is concerned about the cash flow position of the company. Customers have placed large orders, but Andrew (the CEO) has insisted on an aggressive pricing policy, and prices charged do not cover costs. Yul approaches Andrew with his concerns, but Andrew will not listen. Andrew is a high-profile member of the local community; the success of the company means that it can hire a large number of people in this economically depressed area, and it is inconceivable to him that booming sales could translate into losses. Yul explains that the auditors will be coming soon and, if he doesn’t expose the current position, they will uncover it anyway. Andrew tells him that he understands, but that he wants Yul to do whatever it takes to get through this audit. Afterward, prices can be raised, since by then the company will be in a strong position in the marketplace and this temporary hurdle will have been overcome. Yul is trying to devise a strategy to reconcile his professional responsibilities and the survival of this company. It would be devastating to see the company close if he is unable to find a way of presenting the information to satisfy the auditors. Discuss the pressures Yul faces. What should he do now? Answer: The predicament that Yul faces is the classic dilemma of the financial advisor—typically a professional accountant—who is being pressured to find a short-term solution that will allow the company to survive. Inevitably, there are genuine concerns, such as maintaining employment. The fundamental problem that Yul faces is that this company cannot be economically viable unless it changes its pricing strategy. It is operating at a loss and sooner or later there must be a time of reckoning. Andrew is the classic entrepreneur who sees only the big picture of growth and soaring sales. He refuses to accept that each sale is taking the company further into a deficit position. The arithmetic in this case is simple. Unless there is either a change in pricing policy or an infusion of cash, the company will fail. Yul’s obligations are clear. He must present the financial information truthfully. Ultimately, there is unlikely to be any legitimate accounting presentation that will disguise the fiscal truth. Yul’s contribution to the organization must be to force the CEO to face reality. Yul can assist in trying to get additional investors, but he can do this only on the basis of truthful presentation of the financial status. The issue for Andrew is whether he is prepared to raise prices now, rather than after the audit. If Yul were to go along with Andrew’s request, what would it take to get through the audit? Can it be achieved without any fraud or failure to disclose? If not, why would Yul trust Andrew to do the “right” thing after the audit? Ultimately, Yul may face the decision to go along with Andrew’s request or quit the company. He may feel swayed by the belief that if he refuses to go along with an improper request, someone else will. This should not influence the decision. His resignation alone should be a warning factor for the auditors. The best chance for the company may be to have its present status disclosed. Some people will lose employment in the short term, but continuing to disguise the truth will result in total collapse in the longer term. If Yul participates in the cover-up, he will be as responsible for the outcome as Jones Manufacturing and Andrew. Allegations of fraud may also emerge. As a professional accountant, Yul must give primary consideration to the standards set by his professional body. 6. Environmental Consultants Ltd. (ECL) was hired by Crass Developments Ltd. (CD) to evaluate a prospective development site for signs of pollution. The site had previously been used for a variety of industrial purposes but was then vacant. CD was considering a number of possible sites and wanted to choose the one with the lowest environmental risk. At the time, ECL had plenty of work and wanted to complete the evaluation for CD as quickly as possible. The senior partner at ECL assigned two junior employees to the CD job, one with two years’ experience and the other just recently hired. They did a site inspection and conducted a few soil tests that were appropriate for a “clean” site but not for one that had been used previously. They produced a positive report. The senior partner was out of the office for a few days, so the report was sent to CD without his approval. CD bought the land; a year later, signs of pollution began to emerge and CD was responsible for an expensive cleanup effort. To what degree are ECL and the three employees responsible for CD’s cleanup costs? Answer: ECL has committed the tort of professional negligence. It is clear that ECL owed a duty of care to CD and that that the standard of care was breached. The next step in a negligence action is whether or not the breach of the standard of care was the cause of CD’s loss. The court looks to the self-governing body to determine if the professional breached the industry standard of care. Expert witnesses will determine if there was a breach or not. In this case, a breach of the professional standard is fairly obvious. CD’s agreement was with ECL. Therefore, the next issue is whether or not the employees are personally responsible for the loss, or whether ECL is solely responsible, or whether both are responsible. The senior partner’s inadequate supervision of the two junior employees is likely negligent, and the firm of ECL will be liable for the loss to CD. Whether the personal assets of the senior partner can be seized would depend on whether or not there was insurance. In most cases, professionals have insurance to cover such claims. 7. Jonathan commenced a lawsuit against Randy for an alleged breach of contract, claiming $500,000 in damages plus interest and costs. Randy approached Smithson, a local lawyer, to provide her with legal advice regarding the lawsuit. Smithson spent many hours discussing the facts of the case with Randy, and reviewed all of the evidence that Randy had in her possession. At the end of the review, Smithson advised Randy that, in his opinion, Randy had an excellent likelihood of success defending the lawsuit and that he would be happy to assist her in doing so. Randy and Smithson then signed a retainer agreement, which provided for the engagement of Smithson as Randy’s lawyer in connection with the lawsuit and the payment of legal fees based on the time expended by Smithson on the file. The lawsuit went to trial, and Randy lost. She was ordered to pay the full amount of $500,000, plus $40,000 in interest and $30,000 in costs. Following the trial, Smithson sent Randy a bill for $75,000 in fees, including the time that he had spent prior to the retainer agreement having been signed. Randy feels that she did not receive competent legal advice from Smithson, and that she should not have to pay the entire bill. Answer: How much should Randy have to pay? What are Smithson’s obligations to Randy? What are Randy’s options? In answering this question, it is helpful to break the analysis down by individual legal issue, because each issue requires a different analysis. Whether Randy has a claim against Jonathan for providing poor advice will depend on whether Jonathan was professionally negligent. The facts do not indicate the degree of diligence that Jonathan used in reviewing Randy’s case. If Jonathan acted as a reasonably competent lawyer would have acted in similar circumstances, then Jonathan will not be liable in negligence to Randy (even though the advice he gave turned out to be wrong advice). If Jonathan acted carelessly or unreasonably in providing his advice, then Randy may be able to make a claim in negligence for any damages that she has suffered as a result of the negligence. Randy will be responsible for paying what she agreed to pay in the retainer agreement, as a matter of contract law. The ordinary principles of contract law would apply to this issue: Jonathan would have to establish that there was a contract, and Randy would have the defences potentially available to her under contract law including mistake, mistake, undue influence, or duress. In regard to the fees which Jonathan billed Randy for work that was done prior to the retainer agreement, this would be a claim for quantum meruit by Jonathan, because there was no contract in place at the time the services were performed. Jonathan could ask the court to order Randy to pay a reasonable amount for the services that were provided. If Randy can establish that Jonathan was negligent, then the practical effect will be that she will not have to pay all of Jonathan’s legal fees or, if Randy’s damages exceed the amount of the fees, anything at all. In addition, if Randy feels that Jonathan’s fees were excessive for the work that he performed, then she can apply to have his bill taxed and a judge will determine the appropriate amount of the fees that Jonathan should be paid. Solution Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085