RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54, [2008] 3 SCR 79

                                                 SUPREME COURT OF CANADA

Between:

RBC Dominion Securities Inc.

Appellant

and

Merrill Lynch Canada Inc., James Michaud, Don Delamont,

Reginald Bellomo, James Swift, John Evin, Dave Neilson,

Victor Kravski, Christine Clarke, Alan Duffy, Connie Dodgson,

Norma Juozaitis, Alison Van Nest Klein, Barbara Daniel

and Holly Hale

Respondents

Coram: McLachlin C.J. and Binnie, Deschamps, Fish, Abella, Charron and Rothstein JJ.

______________________________

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., [2008] 3 S.C.R. 79, 2008 SCC 54

RBC Dominion Securities Inc.                                                                                          Appellant

v.

Merrill Lynch Canada Inc., James Michaud, Don Delamont,

Reginald Bellomo, James Swift, John Evin, Dave Neilson,

Victor Kravski, Christine Clarke, Alan Duffy, Connie Dodgson,

Norma Juozaitis, Alison Van Nest Klein, Barbara Daniel

and Holly Hale                                                                                                               Respondents

Indexed as:  RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc.

Neutral citation:  2008 SCC 54.

File No.:  31904.

2008:  April 25; 2008:  October 9.

Present:  McLachlin C.J. and Binnie, Deschamps, Fish, Abella, Charron and Rothstein JJ.

on appeal from the court of appeal for british columbia

Employment law — Employment contract — Breach of implied terms — Branch manager orchestrating transfer of his branch’s employees to competitor’s branch — Mass exit occurring without notice — Action for damages for breach of implied terms of employment contract against branch employees and branch manager — Whether breach — Assessment of damages.

In a move which D, the Cranbrook RBC branch manager, helped to coordinate, virtually all the investment advisors at that branch left without notice for the branch of its competitor, Merrill Lynch.  RBC sued D and its other employees who left, claiming compensatory, punitive and exemplary damages.  It also sued Merrill Lynch and its manager.  The Supreme Court of British Columbia held that (1) the former employees breached the implied terms of their employment contracts requiring reasonable notice and prohibiting unfair competition with RBC; and, (2) D had breached his contractual duty by coordinating the departure and by failing to inform RBC management.  D and the other investment advisors were not found to be fiduciary employees.  The trial judge not only assessed damages against both D and the employees for RBC losses but also found Merrill Lynch jointly and severally liable for the award as it had induced the employees’ breach of their implied duty not to compete unfairly.  The majority of the Court of Appeal varied some of these damages.  At issue were whether the Court of Appeal properly overturned the award of damages against the former RBC employees and Merrill Lynch and its manager for losses caused over a five‑year period and whether it properly set aside the award against D on the finding of breach of a contractual duty of good faith.

Held (Abella J. dissenting in part):  The appeal should be allowed in part.  The trial judge’s award should be reinstated with the exception of the damages the trial judge found payable by the investment advisors for losses due to unfair competition based on their actions during the reasonable notice period.

Per McLachlin C.J. and Binnie, Deschamps, Fish, Charron and Rothstein JJ.:  Damages arising in respect of a breach of contract should be such as arise either naturally, or 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 a breach.  In organizing the mass exit, D breached his contractual duty of good faith, for an implied term of his employment contract was the retention of RBC employees who were under his supervision.  The damages for that breach were the amount of loss it caused to RBC.  [10] [13]

Generally, an employee who has terminated employment is not prevented from competing with his or her employer during the notice period, and the employer is confined to damages for failure to give reasonable notice.  A departing employee might be liable for specific wrongs, however, such as improper use of confidential information during the notice period.  The award of damages on the basis that the employees continued to be under a general duty not to compete was wrong in law.  Further, given the global loss of profits award made against D, it would be inappropriate to award additional damages against the investment advisors for loss of profits based on improper use of confidential information.  [18] [20-21]

Per Abella J. (dissenting in part):  D, a part‑time branch manager at RBC in Cranbrook, was asked by M, a friend and former colleague now at Merrill Lynch, to help facilitate the recruitment of RBC investment advisors to competitor Merrill Lynch.  In so doing, D did not breach an implied duty of good faith in his employment contract.  Significantly, there was no restrictive, non‑competition clause in D’s employment contract, and he was found by the trial judge not to be a fiduciary employee.  Yet the trial judge nonetheless imposed a fiduciary‑like, elevated duty of good faith.  This has the effect of creating a new legal category of “quasi‑fiduciary” employee, causing inevitable uncertainty for employees who, until now, had the legal right to change employment without fear of financial liability.  Breach of the employee’s implied duty of good faith has traditionally only given rise to damages where there was competition during employment or improper use of confidential information.  Imposing an enforceable obligation on D to protect RBC’s interests by actively attempting to retain investment advisors within the company, therefore, represents a novel reformulation and extension of how courts have interpreted and applied a non‑fiduciary employee’s implied duty of good faith.  Employees are not indentured servants.  In the absence of a fiduciary relationship or non‑competition clause, they are legally free to leave and enter into competition with former employers, either individually or in a group. [33] [42] [46] [48-49] [53-55] [62]

A necessary corollary of an employee’s lawful right to compete following employment is the right to plan for future employment opportunities while still employed.  D was free to leave RBC and to discuss his intentions with his co‑workers.  They, in turn, were free to be influenced by him.  There was, as a result, no breach of D’s duty of good faith to RBC, either in the fact of his own departure, or in his facilitating the departure of the other investment advisors.  Even assuming a breach of the duty of good faith took place, the damages were excessive based on contractual breach principles.  Awarding damages against D for a period of five years contradicts the reasonable expectations of the parties, especially given the highly competitive and mobile nature of employment relationships in this industry.  [57] [62-63] [65]

Cases Cited

By McLachlin C.J.

Referred to:  Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145.

By Abella J. (dissenting in part)

Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592; CRC‑Evans Canada Ltd. v. Pettifer (1997), 26 C.C.E.L. (2d) 294; Alnor Services Ltd. v. Sawyer (1990), 31 C.C.E.L. 34; Faccenda Chicken Ltd. v. Fowler, [1986] 1 All E.R. 617; Barton Insurance Brokers Ltd. v. Irwin (1999), 170 D.L.R. (4th) 69; Imperial Sheet Metal Ltd. v. Landry (2007), 315 N.B.R. (2d) 328, 2007 NBCA 51; Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916; Research Capital Corp. v. Yorkton Securities Inc. (2002), 329 A.R. 190, 2002 ABQB 957; Restauronics Services Ltd. v. Forster (2004), 239 D.L.R. (4th) 98, 2004 BCCA 130; Kusy’s Electric Ltd. v. Sullivan (2007), 305 Sask. R. 210, 2007 SKQB 397; Cinema Internet Networks Inc. (c.o.b. Cinemaworks) v. Porter, [2006] B.C.J. No. 3200 (QL), 2006 BCSC 1843; Monarch Messenger Services Ltd. v. Houlding (1984), 56 A.R. 147; Golden Images Management Ltd. v. Champers Enterprises Ltd., [2001] B.C.J. No. 1308 (QL), 2001 BCSC 924; Slaight Communications Inc. v. Davidson, [1989] 1 S.C.R. 1038; Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701; Westcan Bulk Transport Ltd. v. Stewart (2005), 373 A.R. 236, 2005 ABQB 97; Leith v. Rosen Fuels Ltd. (1984), 5 C.C.E.L. 184; Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145; Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3, 2006 SCC 30; Matheson (D.W.) & Sons Contracting Ltd. v. Canada (Attorney General) (2000), 187 N.S.R. (2d) 62, 2000 NSCA 44; Ernst & Young v. Stuart, [1993] 6 W.W.R. 245.

Authors Cited

Ball, Stacey Reginald.  Canadian Employment Law, vol. 1.  Aurora, Ont.:  Canada Law Book, 1996 (loose‑leaf updated July 2008).

Cassels, Jamie, and Elizabeth Adjin‑Tettey.  Remedies:  The Law of Damages, 2nd ed.  Toronto:  Irwin Law, 2008.

Echlin, Randall Scott, and Christine M. Thomlinson.  For Better or For Worse:  A Practical Guide to Canadian Employment Law, 2nd ed.  Aurora, Ont.:  Aurora Professional Press, 2003.

England, Geoffrey.  Employment Law in Canada, vol. 2, 4th ed.  Markham, Ont.:  LexisNexis Butterworths, 2005 (loose‑leaf updated May 2007, release 11).

APPEAL from a judgment of the British Columbia Court of Appeal (Finch C.J. and Southin and Rowles JJ.A.) (2007), 25 B.L.R. (4th) 211, 275 D.L.R. (4th) 385, [2007] 3 W.W.R. 383, 235 B.C.A.C. 126, 388 W.A.C. 126, 63 B.C.L.R. (4th) 3, 55 C.C.E.L. (3d) 240, 2007 CLLC ¶210-006, [2007] B.C.J. No. 48 (QL), 2007 CarswellBC 46, 2007 BCCA 22, overturning in part the decision of Holmes J. with respect to liability (2003), 44 B.L.R. (3d) 72, 55 C.C.E.L. (3d) 179, [2003] B.C.J. No. 2700 (QL), 2003 CarswellBC 2923, 2003 BCSC 1773, and varying the decision with respect to damages (2004), 50 B.L.R. (3d) 308, 36 B.C.L.R. (4th) 138, 55 C.C.E.L. (3d) 208, [2004] B.C.J. No. 2337 (QL), 2004 CarswellBC 2631, 2004 BCSC 1464, and dismissing the cross‑appeal.  Appeal allowed in part, Abella J. dissenting in part.

Michael E. Royce, Risa M. Kirshblum and Catherine Powell, for the appellant.

Terrence J. O’Sullivan, M. Paul Michell and Stein K. Gudmundseth, for the respondents.

The judgment of McLachlin C.J. and Binnie, Deschamps, Fish, Charron and Rothstein JJ. was delivered by

The Chief Justice —

1.  Introduction

[1]     The appellant RBC Dominion Securities Inc. (“RBC”) and the respondent Merrill Lynch Canada Inc. are competitors in the investment brokerage business.  Each had offices in the small city of Cranbrook, British Columbia.  In November 2000, virtually all the investment advisors at RBC, in a move coordinated by the branch manager, Don Delamont, left RBC and went to Merrill Lynch.  As a result of the departure only two very junior investment advisors whom Merrill Lynch had not sought to recruit and two administrative staff members remained at the branch.  No advance notice was given to RBC.  In the weeks preceding the employees’ departure, RBC’s client records had been surreptitiously copied and transferred to Merrill Lynch.  RBC’s office was effectively hollowed out and all but collapsed.

[2]     RBC sued Merrill Lynch and its former employees claiming compensatory, punitive and exemplary damages.  It raised the following causes of action:

–                 Against its former employees: breach of fiduciary duty, breach of implied contractual term not to compete unfairly upon leaving RBC’s employ, breach of implied contractual term to give reasonable notice of termination, and an action for misuse of confidential information.

–                 Against Merrill Lynch and its manager James Michaud: breach of duty in tort for inducing RBC staff to terminate their contracts of employment without notice and to breach their contractual obligation not to compete unfairly.

–                 Against all the respondents: actions in tort for conspiracy and conversion, the latter related to the removal of documents known to be the property of RBC.

[3]     The Supreme Court of British Columbia allowed the RBC action ((2003), 44 B.L.R. (3d) 72, 2003 BCSC 1773).  Holmes J. dismissed the claims for conspiracy and found that no fiduciary duties were owed by the former employees.  

[4]     Holmes J. held that the former employees breached the implied terms of their employment contracts to provide reasonable notice of termination of their employment and not to compete unfairly with RBC. She found that the former employees provided inadequate notice of termination, engaged in concerted and vigorous efforts to move clients to Merrill Lynch before RBC could protect its relationships, and removed confidential client records belonging to RBC several weeks before leaving.  She also held the former employees, as well as Merrill Lynch and Michaud, liable in tort for conversion of the RBC confidential client records.  Holmes J. further held that branch manager Delamont had breached his contractual duty to perform his employment duties faithfully to RBC by promoting and coordinating the departure, while at the same time failing to inform RBC management of the departure. 

[5]     In a second segment of the trial ((2004), 50 B.L.R. (3d) 308, 2004 BCSC 1464), Holmes J. assessed damages for these contractual and tortious wrongs. She made a large award of damages against Delamont arising out of his breach of the implied duty of good faith, having found that this breach resulted in a near-collapse of the Cranbrook branch.  Holmes J. additionally made awards against all the investment advisors, including Delamont, for loss of profits during the notice period and future loss of profits due to unfair competition during that period. Merrill Lynch was held jointly and severally liable for the latter award, having induced the employee’s breach of their implied duty not to compete unfairly.  Additional punitive damages based on the conversion of the client records were awarded at trial and are not in issue in this Court.

[6]     The majority of the Court of Appeal reversed some of these damages, Rowles J.A. dissenting in part ((2007), 25 B.L.R. (4th) 211, 2007 BCCA 22).  The following chart summarizes the main awards at issue.  It is common ground that Merrill Lynch has indemnified or will indemnify the individual defendants for any damages awarded against them.

[7]     In this Court, the appellant RBC seeks reinstatement of  the award of the trial judge.  I agree, with the exception of the damages the trial judge found payable by the investment advisors for losses due to unfair competition based on their actions during the 2.5 week notice period.  I would therefore allow the appeal in part, substantially for the reasons of Rowles J.A. in the Court of Appeal.

2.  The Loss of Profits Award Against Delamont

[8]     The trial judge awarded damages in the amount of $1,483,239 against Delamont for the loss of profits RBC suffered as a result of his failure to perform his duties in good faith, specifically, his orchestration of the departure of virtually all RBC’s investment advisors.  This award rested on specific findings of fact by the trial judge:

[E]qually part of [Mr. Delamont’s] job description was to attempt to retain [investment advisors] within DS, and certainly not to promote or coordinate their departure and the departure of the clients they serviced. [(2003), 44 B.L.R. (3d) 72, at para. 125]

Mr. Delamont’s breach of his duty as branch manager caused the departures from DS, except for those of Mr. Swift and Mr. Kravski.  He is liable for DS’s loss resulting from the near-collapse of the branch . . . .

                                                                            . . .

In summary, Mr. Delamont’s breach did much more than provide the mere occasion for the mass departure.  His various acts and failures in breach of his duty to DS led directly to the circumstances in which the employees determined to leave.  I am satisfied that his breach caused the mass departure and the near collapse of the DS branch, but did not cause the departures of Mr. Swift and Mr. Kravski. [(2004), 50 B.L.R. (3d) 308, at paras. 144 and 48]

The majority of the Court of Appeal overturned this award on the ground that it had not been properly pleaded, and on the further ground that, in any event, the damages claimed were not “proximate” as required by contract law: Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145.

[9]     The respondents argue that the pleadings were inadequate to support the award of $1,483,239 against Delamont for loss of profits due to the near-collapse of the RBC office.   I am satisfied, as were the trial judge and Rowles J.A., that the pleadings supported this award. The further amended Statement of Claim specifically pleaded that

[e]ach branch is managed by a Branch Manager who has responsibility for running the day-to-day operations of the branch, hiring, coaching, counselling and supervising employees . . . . [A.R., at p. 223, para. 20]

The trial judge found that Delamont had breached his managerial duty.  In any event adopting a purposive approach, courts on pleadings motions inquire into any prejudice the alleged defect may have caused.  Here there was none.  The allegation that Delamont had organized the defection of RBC’s entire staff of investment advisors was understood by the parties to be in issue, as examination on the matter during the trial attests.

[10] Second, the respondents argue that the award does not meet the requirement of proximity for contract damages set out in Hadley v. Baxendale. That test provides that damages arising in respect of a breach of contract should be such as arise either naturally, i.e., in the usual course of things, 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 a breach.  The respondents argue that it was not within contemplation of the parties that Delamont be held liable for losses beyond the applicable notice period.

[11] The trial judge rejected the defendant’s arguments on this point, finding that reasonably contemplated losses were not confined to the notice period:

I do not conclude that the parties to his employment contract contemplated that Mr. Delamont’s liability for such a breach would be restricted to losses associated with the period of notice he ought to have given. [(2004), 50 B.L.R. (3d) 308, at para. 55]

[12]        It is apparent that the majority of the Court of Appeal applied the proximity test wrongly.  Instead of asking whether damages of this sort would have been within the reasonable contemplation of the parties had they put their minds to the potential breach when the contract was entered into, the majority of the Court of Appeal asked whether the breach was foreseeable.  The majority held that the collapse of the branch was not a foreseeable consequence of Delamont’s chosen course of action, because “neither of the parties to this contract would have ever thought about this sort of alleged breach” (para. 106).  With respect, this argument conflates the unforeseeability of the consequences with the unforeseeability of the breach.  The correct question to ask is whether, had the parties at the time of entering into the contract of employment directed their minds to the possibility that Delamont might orchestrate the departure of substantially all the office’s investment advisors, would they have contemplated a loss of profits giving rise to damages.  In my view, the trial judge asked the correct legal question and arrived at an appropriate conclusion on the facts.  There is no basis for interference on the grounds of Hadley v. Baxendale.

[13] Other objections to this award can be quickly dispensed with.  The basis of the largest part of the award, as conceived by the trial judge and the dissenting judge in the Court of Appeal, was the breach of Delamont’s duty of good faith in the discharge of his employment contract.  An implied term of that contract, as he admitted at trial, was to retain the employees of RBC who were under his supervision.  In organizing their mass exit, he breached that duty of good faith.  The damages for that breach are the amount of loss it caused to RBC.  To calculate that loss, the trial judge chose a position intermediate between those advanced by the plaintiff and the defendant.  After hearing extensive expert evidence from both sides, she measured the loss on the basis of five years, discounted for various contingencies.  That was reasonable and supported by the evidence. 

3.  The Unfair Competition Award Against the Investment Advisors

[14] The trial judge awarded a total of  $40,000 in damages against the investment advisors, including Delamont, for failure to give reasonable notice of termination of employment. The award was calculated based on the profits that they would have contributed to RBC during the 2.5 week notice period. The Court of Appeal unanimously upheld this award.

[15] In addition, the trial judge awarded a total of $225,000 against the investment advisors for unfair competition. The trial judge held that during the 2.5 week notice period, the departing employees remained subject to their contractual duties and specifically their general duty of fidelity to RBC, which prevented them from competing with RBC during this period.  She found that by competing against RBC during this period, the investment advisors, including Delamont, caused RBC losses that continued after the notice period.  Specifically, she found that in the absence of this “unfair” competition, RBC would have retained 25 percent rather than 13.5 percent of its clients. Hence the trial judge made an award against all the investment advisors for 11.5 percent of RBC’s profits over a five-year period. This award was in addition to the $40,000 award for failure to give reasonable notice.

[16] The appellant asks that this award, which all members of the Court of Appeal found unjustified, be reinstated.

[17] The difference between the trial judge and the Court of Appeal on this issue reflects a different view of the obligations of employees leaving their employ without notice.  The trial judge, as discussed above, took the view that the employees continued to be under a general duty not to compete with their former employer during the notice period.  This formed the basis of her award for non-competition damages against them.

[18] The majority of the Court of Appeal, by contrast, held that once the investment advisors left RBC, they were no longer under a duty not to compete with it.  The view of the Court of Appeal on the law for the purposes of this issue may be summed up as follows.  Generally, an employee who has terminated employment is not prevented from competing with his or her employer during the notice period, and the employer is confined to damages for failure to give reasonable notice (Southin J.A. for the majority).  To this general proposition Rowles J.A. may be read as adding the qualification that a departing employee might be liable for specific wrongs such as improper use of confidential information during the notice period.    This appears to be consistent with the current law, which restricts post-employment duties to the duty not to misuse confidential information, as well as duties arising out of a fiduciary duty or restrictive covenant: see G. England, Employment Law in Canada (4th ed. (loose-leaf)), vol. 2, § 11.141.  Neither of the latter duties is at issue here.

[19] For the purposes of this case, the law may be accepted as summarized by the preceding paragraph.  The contract of employment ends when either the employer or the employee terminates the employment relationship, although residual duties may remain.  An employee terminating his or her employment may be liable for failure to give reasonable notice and for breach of specific residual duties.  Subject to these duties, the employee is free to compete against the former employer.

[20] To the extent the trial judge awarded damages on the basis that the employees continued to be under a general duty not to compete, this award of damages was wrong in law.

[21] The trial judge made additional findings about the RBC employees’ use of confidential client records which suggest she might have awarded damages even in the absence of this erroneous holding. The trial judge made findings of fact regarding efforts of the employees to remove confidential information before leaving RBC ((2003), 44 B.L.R. (3d) 72, at paras. 24-25).  At para. 29 the trial judge made an additional finding that Merrill Lynch used these records to solicit RBC clients between the employees’ departure and the return of the records shortly thereafter.  In overturning the award Rowles J.A. emphasized that the documents were very quickly returned, which may suggest she viewed the trial judge as implicitly having concluded that no specific loss flowed from the conversion of the records due to the short duration they were held.  The trial judge took into account the use of confidential information in making the global loss of profits award against Delamont, and accepted RBC’s concession that no damages arose “uniquely” from the conversion of the records.  I agree with Rowles J.A. that, having made a global loss of profits award against Delamont, it would be inappropriate to award additional damages against the investment advisors for loss of profits based on improper use of confidential information.  It follows that this Court need not entertain the specific issue of the conversion of the documents.

4.  Miscellaneous Matters

[22] A number of interesting issues were raised in the course of argument that I do not find it necessary to consider.  There was some discussion of the nature of the legal duties of managerial and non-managerial employees; the suggestion was that the former might have quasi-fiduciary duties, while the latter would not. The duties found here for all the defendant employees were the implied duties to perform one’s employment functions in good faith and to give reasonable notice of termination.  The compensatory damages awarded are grounded in these implied duties which were not seriously disputed.  It is therefore unnecessary for the purposes of this case to go beyond these duties.

[23] Nor was there any dispute about the period of reasonable notice assigned by the trial judge.  In fixing the notice period at 2.5 weeks, the trial judge took into account the effect on RBC of the simultaneous departure of virtually the entire staff of the branch.  The trial judge, it may be noted, clearly segregated the different duties that arose in these employment contracts.  The duty to give notice of departure led to damages, assessed in relation to the length of the notice period.  Other contractual duties, such as the duty of good faith, gave rise to the large award against Delamont for loss of profit.  Overlaps in damages arising from the various duties were avoided.  Finally, it is not suggested that the awards of punitive damages were in error.

5.  Conclusion

[24] I would allow the appeal in part.  The order of the trial judge is reinstated, with the exception of the unfair competition awards against the investment advisors arising out of conduct during the 2.5 week notice period.  

[25] Costs are to follow the event.

The following are the reasons delivered by

[26] Abella J. (dissenting in part) — In the best of all possible worlds, employers and employees would treat each other with mutual respect, consideration and empathy.  In the real world, however, as the dispute before us demonstrates, this aspiration is not always realized.  The question, then, is at what point does the breakdown of an employment relationship cross the legal line from conduct that is disappointing to conduct that is compensable.

Background

[27] RBC Dominion Securities Inc. (“RBC”) and Merrill Lynch Canada Inc. are both investment and securities dealers.  When the events giving rise to this litigation took place in 2000, each had a British Columbia branch in Cranbrook and was the other’s main competition there.  On November 20, 2000, most of the investment advisors and their assistants in the Cranbrook branch left RBC to work for Merrill Lynch. 

[28] The RBC employees were recruited by James Michaud, the regional manager of Merrill Lynch, who had worked for RBC and its predecessor for almost 20 years prior to joining Merrill Lynch in January 2000.  At Michaud’s request, Don Delamont, the RBC branch manager and a friend of Michaud’s, arranged a meeting between Michaud and the RBC investment advisors.  This meeting eventually led to the investment advisors, including Delamont, leaving RBC and joining Merrill Lynch.

[29] RBC immediately contacted its clients and sought to retain their business.  Most clients chose to leave with their departing investment advisors.

[30] RBC sued Merrill Lynch, Michaud, Delamont, its former investment advisors and several assistants.  At trial, the investment advisors were found liable for a total of $40,000 for failing to give RBC 2.5 weeks’ notice of their departure.  These awards are not under appeal.  The trial judge also awarded RBC punitive damages based on the “conversion” of RBC’s confidential client records:  $5,000 against each investment advisor, $10,000 against Delamont, $10,000 against Michaud and $250,000 against Merrill Lynch.  These punitive damages are similarly not being appealed.

[31] The trial judge concluded that all of the investment advisors had engaged in “unfair competition” when they left RBC ((2003), 44 B.L.R. (3d) 72, 2003 BCSC 1773).  Along with Merrill Lynch and Michaud, they were held jointly and severally liable for the losses this caused RBC over a five-year period, amounting to a total of $225,000.  The Court of Appeal unanimously overturned this award ((2007), 25 B.L.R. (4th) 211, 2007 BCCA 22).  This is part of RBC’s appeal to this Court.

[32] Delamont, RBC’s former branch manager, was found to have breached a contractual duty of good faith owed to his employer by facilitating the departure of the other investment advisors to Merrill Lynch.  The trial judge awarded damages against him in the amount of $1,483,239, based on an estimate of the branch’s lost profits over a five-year period: see (2004), 50 B.L.R. (3d) 308, 2004 BCSC 1464.  A majority of the Court of Appeal set aside this award against Delamont.  This too is being appealed by RBC.

[33] The trial judge, however, rejected RBC’s argument that Delamont and the other investment advisors were fiduciary employees.  She held that, given the “acknowledged inevitability of active competition for clients at the relationship’s end”, none of the investment advisors, including Delamont, could be fixed with fiduciary duties ((2003), 44 B.L.R. (3d) 72, at para. 66).  The finding that there was no fiduciary relationship between RBC and any of the investment advisors, including Delamont, is not under appeal.

[34]  I agree with the Chief Justice’s conclusion that the Court of Appeal was correct to overturn the unfair competition award made by the trial judge against the investment advisors.  But I respectfully disagree with the conclusion that Delamont breached an implied contractual duty of good faith in the manner of his departure.  Moreover, in my view the trial judge’s finding that RBC’s compensable period of loss was five years is unjustified by any principle of damages for breach of contract, let alone for this particular employment contract.

Analysis

[35] The only questions before us are whether Delamont breached an implied duty of good faith to his employer and, if he did, the extent of the damages.  These are narrow issues with wide implications.

[36] The trial judge based her conclusion that Delamont breached this duty on the fact that he failed to retain the employment services of the other investment advisors.  The issue is whether such conduct by Delamont can properly be said to form part of his duty of good faith.

[37] It is an implied term of every employment contract that employees owe a duty of “good faith” to their employers.  This is a duty with imprecise contours, but  traditionally the duty has only been used to find a non-fiduciary employee liable for damages (as opposed to being subject to dismissal) if he or she has competed with the employer during the currency of the employment relationship, or has made improper use of confidential information. 

[38] The trial judge did not find that Delamont competed unfairly with RBC during the course of his employment.  And the breach of his duty to refrain from making improper use of confidential information was conceded before us and is reflected in the punitive damages awarded at trial for the conversion of client records.  In holding Delamont liable in damages for his conduct with the other investment advisors during his employment, the trial judge not only imposed a unique liability, she also punished him for conduct he had every right to engage in.

[39] The employment contract is one of personal service.  That means that subject to the discussion that follows about non-competition clauses and fiduciary duties, employees are generally free to leave their employment and, on leaving, to compete with their former employer.  This is understandably a painful reality for an employer to accept, but it is, nonetheless, a lawful one.  (Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592, at p. 606, distinguishing fiduciary employees; CRC-Evans Canada Ltd. v. Pettifer (1997), 26 C.C.E.L. (2d) 294 (Alta. Q.B.), at para. 54; Alnor Services Ltd. v. Sawyer (1990), 31 C.C.E.L. 34 (B.C.S.C.); Faccenda Chicken Ltd. v. Fowler, [1986] 1 All E.R. 617 (C.A.); Geoffrey England, Employment Law in Canada (4th ed. (loose-leaf)), vol. 2, at § 11-141).

[40] As Hall J.A. stated in Barton Insurance Brokers Ltd. v. Irwin (1999), 170 D.L.R. (4th) 69 (B.C.C.A.), at para. 39:

. . . the general interest of the public in free competition and the consideration that in general citizens should be free to pursue new opportunities, in my opinion, require courts to exercise caution in imposing restrictive duties on former employees in less than clear circumstances.  Generally speaking . . . the law favours the granting of freedom to individuals to pursue economic advantage through mobility in employment.

And in Imperial Sheet Metal Ltd. v. Landry (2007), 315 N.B.R. (2d) 328, 2007 NBCA 51, Robertson J.A. similarly observed, at para. 37, that

if there is a clash between the interests of former employers in protecting their business interests and the interests of former employees in earning a livelihood, coupled with the public interest in free competition for goods and services, it is the interests of the former employee that generally prevail.

In other words, an employee is generally free to enter into competition with a former employer as soon as the employment ends.

[41] The parties to an employment contract can, of course, contractually modify these principles by negotiating a reasonable restrictive covenant (Elsley v. J.G. Collins Insurance Agencies Ltd., [1978] 2 S.C.R. 916).

[42] RBC, a titan in the industry, was perfectly free to ask any of its employees to sign such restrictive covenants when they were hired.  It chose not to.  Neither Delamont nor any of the other investment advisors was subject to a non-competition clause.  This absence of a non-competition clause affects not only the good faith analysis but also the propriety of awarding damages against Delamont for a period of five years, an issue addressed at the conclusion of these reasons.

[43] The trial judge found that the reason RBC did not ask its employees to sign such clauses was because “to require incoming IAs to enter into such covenants is seen as an impediment to recruiting” ((2003), 44 B.L.R. (3d) 72, at para. 99).  Southin J.A., for the majority in the Court of Appeal, explained the irony of this failure as follows:

What we have here is a respondent who is a sophisticated master.  It deliberately chose not to obtain non‑competition and non‑solicitation clauses from its servants, nor to put a term as to length of notice or a term “you promise if you leave our employment you will not compete unfairly” . . . into its written contract, if any, with any of these servants, including Mr. Delamont.

Had it taken proper care of itself by obtaining such provisions, the appellant advisors might well not have entertained the thought of leaving, either because they felt they should observe express terms of a contract, or out of fear of the consequences of not observing such terms. [paras. 57-58]

[44] Given the availability of the option of non-competition clauses, I see no reason for courts to impose, retroactively, restrictions on post-employment competition the parties have not bargained.  As Robertson J.A. said in Imperial Sheet Metal:

Courts should not be reading restrictive terms into employment contracts that could have been negotiated sometime prior to the dissolution of the employment relationship. In the global world, the titans of finance and industry pay millions in exchange for their executives executing non‑competition clauses. Why should courts be handing them out for free when it comes to employees of lesser stature? [para. 6]

[45] In this context, the observations of Martin J. in a case involving similar circumstances are resonant:

. . . [the employer] had not engaged any of the personal defendants in an employment contract with a non-competition clause. . . . I find that to be particularly significant because [the employer] cannot reasonably contend that a mass defection of its employees to a competitor was unforeseeable.  Clearly, it could have protected itself better by having its [employees] enter into such an employment contract.

(Research Capital Corp. v. Yorkton Securities Inc. (2002), 329 A.R. 190, 2002 ABQB 957, at para. 26)

[46] In addition to the absence of a non-competition clause in his employment contract, it must be stressed that Delamont was found by the trial judge not to have been a fiduciary employee.  This is a crucial finding.  There is a clear distinction between those employees who are subject to elevated fiduciary duties and those who are not. (See Canadian Aero Service, at pp. 605-6.  See also Restauronics Services Ltd. v. Forster (2004), 239 D.L.R. (4th) 98, 2004 BCCA 130, at para. 48; Kusy’s Electric Ltd. v. Sullivan (2007), 305 Sask. R. 210,  2007 SKQB 397, at para. 48; Cinema Internet Networks Inc. (c.o.b. Cinemaworks) v. Porter, [2006] B.C.J. No. 3200 (QL), 2006 BCSC 1843, at para. 41; Monarch Messenger Services Ltd. v. Houlding (1984), 56 A.R. 147 (Q.B.), at paras. 13-18; and Golden Images Management Ltd. v. Champers Enterprises Ltd., [2001] B.C.J. No. 1308 (QL), 2001 BCSC 924, at para. 96.)

[47] The finding that Delamont was not a fiduciary employee means that the trial judge in examining Delamont’s duties and responsibilities, the control and independent authority he exercised over RBC’s business, and the nature and organizational structure of that business, was satisfied that he ought not to be subject to the heightened duties expected of fiduciary employees — duties that could well extend beyond an employment relationship. (See Randall Scott Echlin and Christine M. Thomlinson, For Better or For Worse: A Practical Guide to Canadian Employment Law (2nd ed. 2003), at p. 254.)

[48] The trial judge’s decision that there was no fiduciary relationship with RBC was based on her finding that, although Delamont performed “some limited managerial functions”, he was “primarily” an investment advisor, spending 75‑80 percent of his time in this role with a substantial client base representing 35-40 percent of the Cranbrook branch’s assets.  She concluded that Delamont “was not in a position through his role as branch manager to affect the economic interests of [RBC] at either its national level or at the level of the Cranbrook branch” ((2003), 44 B.L.R. (3d) 72, at para. 65).  In other words, Delamont’s “limited managerial functions” gave him no more power to affect RBC’s business interests than any regular investment advisor.

[49] RBC had successfully urged the trial judge to conclude that, even if Delamont were not a fiduciary employee, he was nonetheless in a special position as branch manager.  This led the trial judge to conclude that Delamont’s  implied duty of good faith included an enforceable obligation to protect RBC’s interests by actively attempting to retain investment advisors within RBC.  With respect, unlike the majority in this Court, I see no reason to impose such a duty on an employee in Delamont’s position.  It represents a significant reformulation and extension of how courts have interpreted and applied a non-fiduciary employee’s implied duty of good faith.  It is also inconsistent both with the nature of Delamont’s particular employment relationship, as well as with the culture of the industry in which he was employed.

[50] Fiduciary duties do not arise from an employee’s title, such as branch manager, but from his or her actual authority or control over the employer’s operation. Based on the fact that Delamont had spent less than a quarter of his time performing a managerial role and had no control over corporate decision-making, the trial judge concluded that Delamont was not in a fiduciary relationship with his employer.  Yet she nonetheless demanded what amounts to fiduciary accountability by virtue of the enhanced content she poured into Delamont’s implied duty of good faith.

[51] Injecting such an enhanced content into the implied duty of good faith of a non-fiduciary employee has the effect of creating a new legal category of “quasi‑fiduciary” employee, a subset the law has yet to recognize.  Nor, it seems to me, should it do so now.

[52] Expanding the scope of the duty of good faith in this manner represents a novel and potentially enormous liability on employees.  This development, in my view, is not only unwelcome in its uncertainty and punitive in its impact, it also risks widening what this Court has long recognized to be the imbalance of power in employment relationships, by further entrenching the inherent vulnerability of employees (Slaight Communications Inc. v. Davidson, [1989] 1 S.C.R. 1038, at pp. 1051‑52, Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701, at paras. 91‑93).

[53] Even if it could be said to have been implicit in Delamont’s role as branch manager that he try to retain the investment advisors, it does not follow that this expectation should be elevated into the content of an implied duty of good faith giving rise to a claim for damages.  An employee is not an indentured servant.  In the absence of competition during employment or improper use of confidential information, the duty of good faith has never before been applied to hold a non-fiduciary employee liable in damages for his or her failure to exercise the fullest possible diligence in the pursuit of the employer’s interests.

[54] As the business pages of our newspapers routinely report, non-fiduciary  employees, even senior ones, regularly leave their employers for what they hope will be improved employment opportunities.  Introducing an impediment by means of the uncertainty of a new category of “quasi-fiduciary” employees will likely create an unwarranted chilling effect on the mobility of those senior non-fiduciary employees who have legitimately been under the impression that absent non-competition clauses, they were free, individually or with their colleagues, to leave and compete.

[55] As conceded by the majority, in the absence of a non-competition clause or fiduciary relationship, Delamont had the legal right to leave RBC and to compete with his former employer.  The finding that he nonetheless owed an elevated duty of good faith to RBC seems to me to be inconsistent with this legal conclusion.

[56] Delamont either was or was not in a fiduciary relationship with RBC.  Since the express finding was that he was not, no analogous heightened duties or expectations should be imposed on him.

[57] Nor do I see any compensable breach of a duty of good faith in Delamont’s discussions with the other investment advisors.  It seems to me that a necessary corollary  to an employee’s undisputed right to compete following the termination of the employment relationship is the right to plan for future employment opportunities while still employed.  This is subject, of course, to the duty not to breach an employer’s confidentiality.  But it is not, in my view, a breach of an employee’s implied duty of good faith to search for alternative job opportunities, to negotiate with a competitor, or to talk to co-workers about his or her intentions. (See Stacey R. Ball, Canadian Employment Law (loose-leaf), vol. 1, at p. 15-2, footnote 9.)  I agree with Macklin J.’s observation in Westcan Bulk Transport Ltd. v. Stewart (2005), 373 A.R. 236, 2005 ABQB 97, that:

Every individual has the fundamental right to earn a livelihood. . . . Reasonable restrictions [on that right] do not include those reasonable steps the employee must take to prepare to earn a livelihood as soon as possible following the termination of employment with the employer. [para. 83]

(See also Leith v. Rosen Fuels Ltd. (1984), 5 C.C.E.L. 184 (Ont. H.C.J.), at p. 195.)

[58] There will be those employees who choose to discuss their plans to leave with colleagues. In some cases, this disclosure may well influence another employee, or indeed a group of employees, to consider leaving as well.  There is no implied term in the ordinary employment contract forbidding such conversation or influence.  While Delamont’s plans regarding future employment with Merrill Lynch undoubtedly influenced other RBC investment advisors to follow him, one cannot ignore the fact that the other investment advisors ultimately acted voluntarily in deciding to leave RBC.  In my view, it would be unrealistic and unfair to punish non-fiduciary senior employees who, in lawfully advancing their own professional interests, assist fellow employees in enhancing theirs.  An employee has the right to maximize his or her employment opportunities.  Similarly, an employer is free to make the workplace as hospitable and magnetic as possible for the employees it hopes to retain.

[59] This brings us finally to the specific cultural reality of the industry in which this dispute is taking place, a reality which intensifies the unfairness of holding Delamont liable for damages for assisting the other investment advisors in changing their employment.  RBC operates in an industry where competitive recruiting and sudden changes of employee allegiance are commonplace.  Investment advisors frequently change employers, typically giving little or no notice.  Vigorous post-employment competition is normal in this sector and well within the contemplation of the parties.  The trial judge explained this reality as follows:

The evidence indicated that departing [investment advisors] customarily give little if any notice.  At best, a manager at the firm may receive in‑person notice that the [investment advisor] will be leaving that day.  Often, a departing [investment advisor] gives no notice at all.   

When an [investment advisor] announces that he or she will be leaving for another firm, he or she is usually escorted off the premises immediately, and the locks are changed. 

I take these abrupt practices to reflect the expectation of fierce competition for the clients who are part of the departing [investment advisor’s] book.

((2003), 44 B.L.R. (3d) 72, at paras. 77-79)

She went on to acknowledge that “[c]entral to the relationship between the [investment advisor] and the firm is the implicit acknowledgement that a departing [investment advisor] will carry a large portion of [his or her client book] with him or her to the firm’s serious detriment” and that there was an “inevitability of active competition for clients at the relationship’s end” (Ibid., at paras. 48 and 66).  That competitive reality, which at times inevitably inured to RBC’s benefit as an employer, explains why it did not require its employees to sign non-competition clauses.

[60] Firms also routinely target “competitive hires” from other firms.  About 10-15 percent of those hired at RBC were “competitive hires”.  The trial judge’s description of the practice is illuminating:

At the material time, and likely still today, competitive hiring was commonplace and aggressive, and was seen as necessary to securities firms’ growth.  Firms provided financial incentives and rewards to [investment advisors] who achieved or assisted in bringing in a “competitive recruit”.  The value of competitive recruits consists partly in their experience, but primarily in the book of business they bring from the former firm.  At the material time, a competitive recruit could be expected to bring somewhere between 50% and 75% of his or her client book, a senior broker with a long-term clientele potentially bringing as much as 90% of the book.

(Ibid., at para. 10)

[61] One of the realities that flows from this high degree of employee mobility and competitiveness between firms is that, when an investment advisor leaves, his or her clients do not necessarily stay with the firm.  RBC attempted to persuade its clients to stay.  The fact that it was not a highly successful effort is not surprising given that this is a service industry in which clients are likely to develop a personal relationship with their advisor.  Clients often choose, as is their right, to move with their advisor.

[62] In the absence of any non-competition clause in his contract or a fiduciary relationship with his employer, Delamont was free to leave RBC at any time and to discuss his intentions with his co-workers.  They, in turn, were free, individually or as a group, to be influenced by him.  There was, as a result, no breach of Delamont’s duty of good faith to RBC, either in the fact of his own departure, or in his facilitating the departure of the other investment advisors.

[63]        Even assuming a breach took place, the damages awarded for Delamont’s role in connection with the departure of the investment advisors are grossly disproportionate and exaggerated. The defining explanation of the contractual breach principles of reasonable foreseeability and remoteness is found in Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145, where the court said:

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. [p. 151]

A court must therefore ask itself “what was in the reasonable contemplation of the parties at the time of contract formation” (Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3, 2006 SCC 30, at para. 54).

[64] The principle of remoteness “imposes on damage awards reasonable limits which are required by fairness” (Matheson (D.W.) & Sons Contracting Ltd. v. Canada (Attorney General) (2000), 187 N.S.R. (2d) 62, 2000 NSCA 44, at para. 69, per Cromwell J.A.). It aims “to prevent unfair surprise to the defendant, to ensure a fair allocation of the risks of the transaction, and to avoid any overly chilling effects on useful activities by the threat of unlimited liability” (Jamie Cassels and Elizabeth Adjin‑Tettey, Remedies: The Law of Damages (2nd ed. 2008), at p. 352).  This principle will be informed by the nature and culture of the business in question, and the particular contractual relationship between the parties, including whether the employee is in a fiduciary relationship with his or her employer or subject to a non-competition clause.

[65] The trial judge’s damage award for breach of Delamont’s duty of good faith  was calculated with reference to five years of presumptive losses to RBC.  In the absence of a non-competition clause or a fiduciary relationship, this award against Delamont accords neither with the reasonable expectations of these particular parties nor with anyone else in this industry. Five years of lost profit is an excessive measure of damages, even under an express restrictive covenant. (See England, at §§ 11.31 and 11.37; Ernst & Young v. Stuart, [1993] 6 W.W.R. 245 (B.C.S.C.).)

[66]  The key to this issue is the reasonable expectations of the parties.  Those expectations must necessarily take into account the understanding in this industry that relationships between employees and employers are often short-lived and subject to abrupt change.  Firms engage in aggressively competitive recruitment practices and investment advisors are expected to do everything they can to take clients with them when they leave their employer.  In this culture, a damage award based on five years’ lost profits is unreasonable.  In such a fiercely competitive industry, no non-fiduciary employee without a non-competition clause would reasonably expect to be held liable for the employer’s lost profits arising from his or her departure or the influence it may have had on fellow employees, let alone for so lengthy a period of time.

[67] The award against Delamont is problematic for another reason.  The award for lost profits made against him includes the substantial damages arising from his own departure as an investment advisor.  This has the effect of punishing Delamont for his decision to leave and makes the award of $1.5 million against him, superimposed on a separate punitive damage award of $10,000, additionally and inappropriately punitive.  Since he was entitled to leave, it is difficult to see how Delamont could be punished for lost profits arising from a lawful decision to terminate his employment contract.

[68] I would dismiss the appeal.

Appeal allowed in part, Abella J. dissenting in part.

Solicitors for the appellant:  Lenczner Slaght Royce Smith Griffin, Toronto.

Solicitors for the respondents:  Lax O’Sullivan Scott, Toronto.