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Ontario Court sets aside $100,000 in punitive and mental distress damages in “bad faith” dismissal case

The Ontario Divisional Court recently set aside a generous arbitration decision in which an employee, dismissed on the basis of sick leave fraud, was awarded $100,000 in punitive damages and damages for mental distress.  Readers of Focus may recall the arbitration decision as it represented a marked departure from established principles of arbitral case law (see “Ontario Arbitrator awards over $500,000 in damages to terminated employee”).  In Greater Toronto Airports Authority v. Public Service Alliance Canada, Local 0004 (January, 2011) a panel of three judges allowed the employer’s application for judicial review (in part) and ordered that the quantification of damages for mental distress and punitive damages be referred back to the arbitrator.

The events giving rise to the grievance began in October of 2003 when the employee suffered a work related injury to her knee requiring physiotherapy and eventually surgery.  Following the surgery, the grievor’s doctor provided a medical note stating that the grievor should be off work for four weeks.  During this time, the employer placed the grievor under surveillance and purportedly observed the grievor engaging in activities inconsistent with her reported restrictions.  The employer concluded that the grievor had been dishonest in reporting her absences following her surgery and dismissed the employee in March of 2004.  At the time, the grievor had a clean disciplinary record and was regarded as a satisfactory employee. 

The union grieved the dismissal.  At arbitration, the arbitrator found that the employer did not rely on any medical evidence in terminating the employment.  The employer was also found to have failed to take into consideration the employee’s past work record and the availability of lesser penalties, in accordance with the principles of corrective discipline.  The arbitrator ruled that the employer acted precipitously and in bad faith in terminating the employment and awarded the grievor $500,000 in damages, including amounts for past and future economic loss, mental distress and punitive damages.  The employer applied for judicial review of the arbitrator’s decision and challenged the damage awards.

DAMAGES FOR MENTAL DISTRESS

The Court commenced its analysis by noting that generally arbitrators have refused to award damages for mental distress.  Where they have done so, their decision was based on the nature of the particular clause that had been breached.  By way of example, the Court referred to the decision in Ontario (Ministry of Community Safety and Correctional Services) and Charlton (Re) (2007).  In that case, the Public Service Grievance Board of Ontario awarded the grievor $20,000 in damages for mental distress where the grievor had been a victim of racial harassment, contrary to a contractual right to be free from racial discrimination.  The Board held that the contractual term created an expectation of a psychological benefit, as it was meant to protect the dignity of the employee.  Its breach therefore would be expected to cause mental distress.  The Board stated:

Clearly not all terms and conditions of employment create the expectation of a “psychological benefit”, and damages for mental distress are only available for breach of this type of contractual term.

In applying this principle, the Court considered whether the union and the employer intended to provide a psychological benefit in the collective agreement, and therefore, whether damages for mental distress were within their reasonable contemplation at the time the collective agreement was made.  In the Court’s view, at the time of contract formation, damages for mental distress in the case of breach of contract required proof of an independent actionable wrong.  This was partially due to the fact that the landmark decision in Wallace, and the principle that mental distress is foreseeable in the case of a bad faith termination, had not been decided at the time the collective agreement was formed.  In addition, the Court rejected the arbitrator’s notion that the principal objective of a collective agreement is to secure a psychological benefit. 

Notwithstanding these findings, the Court found that the arbitrator’s award was flawed for another reason.  The arbitrator awarded damages not only for mental distress but also for pain and suffering associated with the grievor’s knee injury.  The arbitrator’s rationale rested on the fact that following her dismissal, the grievor was required to choose between physiotherapy and psychotherapy due to financial constraints.  Finding that the grievor’s knee had not fully healed, the arbitrator awarded a global amount of $50,000 for pain and suffering and for mental distress.  The Court found that there was no medical evidence to support the conclusion that the grievor’s knee injury was aggravated because of the dismissal and the few weeks without physiotherapy.  Furthermore, the arbitrator had not shown how the damages for pain and suffering would have been in the reasonable contemplation of the parties at the time of the collective agreement. 

Although the Court agreed that it may have been reasonable to award damages for mental distress, the arbitrator’s failure to separate the damages for pain and suffering from the damages for mental distress rendered the award of $50,000 unreasonable.

PUNITIVE DAMAGES

In terms of the punitive damage award, the Court agreed that punitive damages are in fact available in breach of contract cases.  The Court stated however that, similar to damages for mental distress, such damages must be based on an independent actionable wrong.  Such an independent actionable wrong is not confined to a tort, but could include the breach of another contractual obligation, or even a fiduciary duty.  The Court noted that in his decision, the arbitrator made no mention of the requirement of an independent actionable wrong.  Although such a wrong may have been inferred from other terms of the collective agreement, the failure to adequately address and discuss this important requirement undermined the arbitrator’s decision. Furthermore, the Court held the GTAA had been denied natural justice, or procedural fairness by the arbitrator’s decision to award punitive damages without inviting submissions on the presence or absence of an independent actionable wrong.

The Court also found that the arbitrator’s award of punitive damages failed to meet the “rationality” requirement.  In terms of rationality, the question is whether the employer’s conduct was so egregious that it requires punitive damages for the purposes of retribution, deterrence and denunciation; and whether the amount awarded is reasonable for these purposes.  In considering these questions, one is required to look at the totality of damages, and in particular whether compensatory damages (such as past and future loss of income) are insufficient to meet the objectives of retribution, deterrence and denunciation. 

The arbitrator’s awards for past and future economic loss amounted to almost 8 years of salary, and included interest on the past loss of income.  There was however no explanation as to why these compensatory damages would be an insufficient deterrent, and why additional punitive damages were necessary.  The Court also noted that the arbitrator failed to discuss why $50,000, as opposed to some lesser amount, was necessary.  In light of these errors and the arbitrator’s denial of natural justice, the Court ruled that the punitive damage award could not stand.   The awards for both punitive damages and damages for mental distress were referred back to the arbitrator for re-quantification.

ECONOMIC LOSS

The Divisional Court upheld the arbitrator’s award for economic loss as reasonable, however, leaving intact the most significant part of the compensation in his award. The Court agreed that the Employer was under a duty to administer the collective agreement in good faith, and upheld the arbitrator’s finding that the employer’s conduct had destroyed the trust underlying the employment relationship. The Court held that in light of the circumstances, both the arbitrator’s award of back pay to the date of termination, and future economic loss to the employee’s earliest retirement date were within “a range of reasonable, acceptable outcomes in the circumstances.”

In Our View

The Divisional Court’s decision is a positive one for employers in some ways as it clarifies certain troubling aspects of the arbitrator’s ruling for example, the arbitrator’s notion that a principal objective of a collective agreement is to secure psychological and mental security.  The arbitrator’s approach to awarding mental distress and punitive damages, if unchecked, would seem to indicate that such damages could be automatically available for breaches of the collective agreement by the employer. In this regard the Court noted that, as was stated in Wallace, the employment contract is not one in which peace of mind is the object of the contract.  Although the Court did not “close the door” on the availability of mental distress damages for breach of a collective agreement, it certainly claws back the circumstances in which they will be available.

The Court referred the questions of mental distress damages and punitive damages back to the arbitrator for reconsideration in light of its decision. The GTAA had requested that these issues be referred to another arbitrator, and the refusal of the Court to do so is no doubt frustrating. Employers can only hope that the arbitrator will give careful consideration to the guidance offered by the Divisional Court, and reach a conclusion consistent with those principles.

For further information, please contact Porter Heffernan at (613) 940-2764.