Monday, July 28, 2014

Law Clerk Dismissed For Cause After Starting Competing Business

Vardalas v. 1455358 Ontario Limited is a recent and interesting Small Claims Court case involving a law clerk suing his former employer, Bougadis Chang LLP, in wrongful dismissal.

The Court found that the employer had just cause to dismiss Vardalas, and dismissed the claim.

The Facts

Mr. Vardalas worked for BC for a little under five years as a law clerk, from July 2006 to June 22, 2011.  BC practices in the areas of insurance lawsuits, personal injury, disability claims, medical malpractice, and "commercial/contractual actions", primarily catering to the Greek, Chinese, and South Asian communities in the GTA.

In March 2011, Vardalas registered a sole proprietorship called "Nomos Consulting Services" - 'nomos' being the Greek word for 'law'.  It officially opened in early June, 2011, and shortly thereafter BC was told about it by the President of the Greek Community of Toronto.  George Bougadis asked Vardalas about it, and Vardalas explained that Nomos was his wife's business, and simply assisted people in filling out forms for citizenship, passport, and pension applications, and that Vardalas himself had nothing to do with it.  Basically, it was a translation service, to hear Vardalas tell it.

Bougadis was satisfied by the explanation, even offering to refer clients to Nomos in appropriate circumstances.  (I'm surprised by this, actually - neither Vardalas nor his spouse were licensed by the Law Society, and carrying on a business under that name would send up alarm bells about what exactly they're holding themselves out as.)

However, the next day, the President of the Greek Community sent an email to Bougadis, enclosing Nomos' "Grand Opening Flyer" - indicating that Nomos assisted with completing forms for a large variety of proceedings, completing 'appeal letters', and provided representation at tribunal hearings - suggesting that Nomos was acting in direct competition with BC in a number of ways.  Furthermore, Bougadis received Vardalas' business card from Nomos, identifying Vardalas as a Nomos 'Consultant'.

Bougadis then confronted Vardalas again, and Vardalas continued to deny involvement in the business.  (It didn't help that Nomos was registered in his own name, either...)  Vardalas was dismissed for cause.

The Issues

The primary issue was 'just cause'.  However, just cause being a high threshold, there were a lot of more technical issues to fight about along the way.  There was a contract executed nearly four months after Vardalas started, imposing restrictions on outside work Vardalas could perform.  Did the contract have 'fresh consideration'?  The Deputy Judge found that it did.  Were the restrictive covenant provisions enforceable?  The Deputy Judge found that they were...but ultimately, it didn't matter, because even without an express written contract, an employee impliedly owes a duty of fidelity:
  • Serve the employer faithfully
  • Not to compete with the employer
  • Not to reveal confidential information
  • Not to conceal from the employer facts which ought to be revealed
  • To provide full time service to the employer
So, contract or not, Vardalas engaged in misconduct by starting up a competing business.  (Had it been a non-competing business, that would have had different might still have violated the terms of the employment contract, but would not so obviously have jeopardized legitimate interests of the employer.)

Worse, when confronted about Nanos, Vardalas lied about it.

The real problem for Vardalas arises because he was often the first point of contact with new clients - he was responsible for client intakes and initial client screenings and pre-interviews.  This required a high degree of trust, and afforded Vardalas an opportunity to steer away clients from BC to Nomos.

Thus, the Deputy Judge was satisfied that Vardalas' conduct was incompatible with his employment obligations, and found that Vardalas had just cause.  (The Deputy Judge went on to assess damages, finding a reasonable notice period of 5 months, but after mitigation income and a 'gratuitous payment' by the defendants of $4,000, the damages only would have been less than $2,700.)


I don't really take issue with any of the Deputy Judge's findings - the specifics of the 'fresh consideration' aren't really set out in much detail in the decision, but from his description, it certainly sounds like that finding was available.  It doesn't surprise me that he concluded that there was just cause, and the reasonable notice period and treatment of mitigation earnings seem perfectly appropriate.  (It appears that the defence actually called the mitigation employer to the stand to give evidence of mitigation earnings.  This is very unusual...but recall my remarks recently about how the onus of proving mitigation earnings is on the defendant?  There you go.)

However, there are two issues I would highlight:  Firstly, the treatment of additional misconduct - while obiter - is troubling, and secondly, there's a potential condonation argument that doesn't really seem to have been addressed.

Additional Misconduct

The employer took a little bit of a 'kitchen sink' approach, raising prior issues of insubordination and absenteeism by Vardalas to bolster its case for cause.  Following one incident, the decision notes that Vardalas "refused to meet with the defendants' Office Manager to discuss this incident and also questioned the Office Manager's authority to deal with the issue".

However, there is absolutely no indication on the face of the decision that any discipline ever occurred for any of these incidents.

The Deputy Judge noted that the 'Nomos' issue was enough to constitute just cause, but even if it wasn't, he would have cumulatively considered its effect with the prior insubordination issues.  And, unless there was discipline for such events, it would have been questionable to do so.  He cited authority for the proposition that prior misconduct can be weighed as well, but such accumulation typically requires a disciplinary record for that misconduct.

Condonation is said to be subject to an implied condition of 'future good behaviour', and there's a line of cases suggesting that 'condoned' behaviour can be used cumulatively with new misconduct to warrant summary dismissal for cause.  However, the language in that line of cases is a little dated, and the word 'condoned' is being used there in the sense of 'forbearance from dismissal at the time', whereas nowadays condonation also may refer to conduct which has tacitly been accepted by the employer.  (For example, if my employee shows up half an hour late to work every day, and I don't object, then the employee comes to believe that I'm okay with it.  My condonation of him showing up late every day last month isn't subject to an implied term that he will show up on time tomorrow...unless I've disciplined him and made it clear that I expect him to show up on time moving forward.)  To borrow an uncited passage from Lancaster House's eText on dismissal, "An employer cannot treat matters of which it was previously aware, but which it never brought to the employee's attention, as cumulativecause for dismissal."

From a policy perspective, that's the preferable analysis, too:  It would be troubling to allow an employer to take the "kitchen sink" approach to just cause, piling onto a new allegation of misconduct every gripe the employer had throughout the employment relationship, but for which discipline was never issued - employees with no disciplinary record, no awareness that they failed to meet the employer's expectations in any way, would suddenly be faced with a mountain of previously unknown complaints.  Not only would it lead to just cause positions being taken against a lot of employees who had no reason to believe their employment was ever in jeopardy, but it would also be a huge burden on the court system and on the parties in terms of complexity and cost of proceedings - suddenly, you have to litigate about a dozen customer complaints received over the last decade, and about a handful of allegedly unjustified absences over the same period, and about that one time in 2007 when the employee allegedly swore at a co-worker...  Discipline not only makes the litigation much cleaner, but it's much healthier in terms of employee relations.


There was a brief reference to a "gratuitous payment" made by the employer, and no indication as to exactly how that came about.

There's conflicting jurisprudence on how that might play out:  There's a 1964 case from the Ontario High Court of Justice, affirmed by the Court of Appeal, called Tracey v. Swansea Construction Co. Ltd., often cited as an authority on condonation, but also interesting for a more narrow proposition regarding the form of termination of the contract:
The simple position appears to me to be this. The defendant desired to dismiss the plaintiff. If there was misconduct or default sufficient to justify discharge it had one of two courses open to it. It could have summarily dismissed for cause or it could have decided to overlook, waive or condone the misconduct and terminate upon notice, or payment in lieu of notice, in accordance with the provision of the contract for termination implied by law. It could not do both, for one would operate as a repudiation of the contract for a breach thereof, and the other, conversely, would operate as an affirmation of the contract and the adoption of its provisions for termination. The fact that the defendant was in error as to the length of, or sufficiency of, the notice given could in no way alter the effect of its intention as expressed by its conduct.
Legal language is often inaccessible, and the older the language, the more foreign it tends to appear.  In a nutshell, what that says is this:  If you fire on a not-for-cause basis, then when the employee insists on more notice than you anticipated, you may be precluded from asserting cause afterward.  From a policy perspective, it makes sense:  Just cause is a very heavy hammer, and shouldn't be used as a matter of course to try to intimidate employees into accepting less than their entitlements.  There's also a sound legal logic underlying it.

However, it's not a hard-and-fast rule.  After-acquired cause is an easy exception - we fired you on a not-for-cause basis, but that was before we discovered that you had been embezzling large sums of money.  Following Tracey, courts have also found that intention is of great importance, and so there have been cases where an employer was permitted to renege on a 'not-for-case' dismissal and plead cause where the intention was something other than condonation (say, to spare the employee's feelings).

So, when I see a reference to a 'gratuitious payment' which would ostensibly satisfy an employee's ESA minimums, that raises a red flag for me as to whether or not a just cause defence is still available.  But, as I said, the facts surrounding the payment aren't clear here.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

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