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Does a Non-Competition Clause Survive a Wrongful Dismissal?

October 1, 2015

From now on, my blog posts will include a reference to the location in my soon-to-be-released book The Law of Work where you will find a discussion of the issues raised in the blog post.  The book and the blog interact.   You can see the reference at the end of this entry.

Does a Non-Competition Clause Survive a Wrongful Dismissal?

This post considers a recent wrongful dismissal decision from Ontario that includes a couple of interesting issues.  The case is called Gordon v. Altus Group Ltd.

Basic Facts

Gordon sold the assets of his company to Altus.  The final amount of the sale was based in part on how well the company performed over the first year and a bit after the sale.  The sale

On Non-Compete Clauses and Punitive Damages

On Non-Compete Clauses and Punitive Damages

agreement included an arbitration provision in case the parties could not agree on the valuation of the company’s performance. Altus hired Gordon to help run the business under a 3 year employment contract with Altus.  That contract required a buy out of Gordon in order to terminate the contract unless there was cause for dismissal.  As the date of valuation approached, Gordon exercised the arbitration option in the sale of assets agreement.  Soon afterwards, he was terminated for cause by Altus and without any payment of the buyout.  Gordon sued for wrongful dismissal.

The employer alleged several grounds for cause, including  frequent profane language with coworkers, frequent bad-mouthing of senior management, and violation of a conflict of interest requirement in the contract.

Decision

The Wrongful Dismissal

The court ruled that there was no cause for termination.  Instead, the employer exaggerated the extent of swearing and bad-mouthing of coworkers in order to build a trumped up case for cause.  In addition, Gordon followed the proper procedure in reporting the potential conflict of interest. The judge didn’t hold back:

It appears  that upon the Plaintiff giving notice for arbitration, Altus  wanted to end the employment contract without paying out the contracted severance funds. In other words, they decided to be cheap and then conjured up a cause for firing in order to save money.

The court ruled that if there was a problem with Gordon’s behaviour, the employer “should have exercised a progressive discipline approach”.   The court found that Gordon was terminated without cause and therefore entitled to damages assessed b the amount of the buyout required by the contract, amounting to $168,845.

Nothing real surprising so far, but a couple of issues in the decision raise eyebrows.

Restrictive Covenant Issue

The court appears to rule that a 2 year non-competition clause in the employment contract is enforceable notwithstanding that the employer had wrongfully dismissed Gordon and repudiated the employment contract.  The court states:

[36] The employment contract contained a non-competition provision that Alan Gordon was not to work in competition with Altus Group for 2 years after termination of his employment. If he was discharged without notice in accordance with the employment contract, and paid the contracted compensation, the 2 year provision would have applied with a reduction of time matching his payout. Mr. Gordon was then locked into the employment contract not to compete with Altus.

This appears to state that as long as the employer is eventually ordered by the court to pay the notice that should have been paid in the first place, then the non-competition clause survives the wrongful dismissal.  That’s questionable.  It seems to fly in the face of a long-standing legal rule that a wrongful dismissal relieves the employee of a restrictive covenant clause.  See for example the discussion in Foreign Exchange Corp. v. Kelcher (starting at para. 44).  Referring to the 1909 decision of the House of Lords in General Billposting Co Ltd v Atkinson, the Alberta Court of Appeal summarized the law in Canada as follows:

 When an employee is dismissed without cause or notice, the employer cannot enforce a restrictive covenant otherwise binding the employee: General Billposting.

The decision in Gordon v. Altus appears to find otherwise in ruling both that the employer terminated Gordon wrongfully (without cause or notice), and yet the non-competition clause remains binding on Gordon.  Am I missing something?

The Punitive Damages Issue

Another eyebrow raiser from this case relates to the court’s order of $100,000 in punitive damages.  The court correctly notes that an order of punitive damages requires a finding of an independently actionable wrong separate from the breach of the notice of termination clause.  What was that independent legal wrong here?  The Court answers this way:

I  accept the submission of the Plaintiff that in the case of Alan Gordon the independent wrong is the termination of Alan Gordon when his company, now named 3GS, gave notice to pursue arbitration  under the asset purchase agreement. Altus failed to perform honestly the employment contract with Alan Gordon.

Hhhhmmm.  Seems to me the first sentence here is simply stating that the employer wrongfully terminated Gordon.  Perhaps what the judge means is that Altus violated a separate implied obligation to “perform the employment contract honestly”.   What do you think of that finding?  Would an appellant court agree that a separate breach of contract has occurred?

References to Law of Work book:

  • Chapter 8:  Considers whether non-competition clauses are enforceable if an employer repudiates the employment contract by wrongfully dismissing an employee.Law of Work
  • Chapter 14: Explores terminations of nonunion employees for cause.
  • Chapter 14:  Discusses how the concept of “progressive discipline” developed by labour arbitrators within the Collective Bargaining Regime has crossed over and been adopted by common law judges in employee discipline and termination cases of non-union employees.  See especially Box 14.3.
  • Chapter 16:  Discusses damages in wrongful dismissal cases.

 

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