By Steven Rastin

The focus of bad faith litigation in Canada is First Party insurance. However, the modern development of punitive, aggravated, and bad faith litigation in Canada is not rooted in insurance cases, but rather in employment law. Developing a better understanding of the similarities between insurance and employment cases would likely assist plaintiffs' lawyers interested in continuing to develop an area of the law that many feel has stalled in Canada in recent years.

A landmark case worth considering is the recent employment law decision of Keays v. Honda Canada.2 Keays represents an important development in bad faith law in Canada. It is therefore surprising to find that, as of the date of this paper, Keays had not been cited in any subsequent decisions.3 Advocates interested in furthering bad faith claims in both employment and insurance cases would be well advised to examine the Keays decision to look for arguments to bolster their cases.

Why is there a natural affinity between bad faith in insurance and employment cases? Well, for one thing, even though bad faith is often considered a tort, it is important to remember that bad faith conduct flows out of the unreasonable refusal to fulfill obligations arising from a contractual relationship. The debate about whether Anglo-Canadian law should recognize a doctrine of good faith flowing from a contractual relationship has been highly controversial, probably due to the fact that there has historically been a fundamental misunderstanding of what the doctrine is all about.4 However, Canadian Courts have not extended good faith obligations to every contractual relationship, but rather they have focused on contracts where significant power imbalance or vulnerability exists with respect to one of the parties to the contract. There are two broad areas where the Courts have historically recognized that the parties are not dealing with each other on a level playing field: the employer-employee relationship and the insurer-insured first party contract of insurance.

The Canadian root case for punitive and bad faith damages is the 1989 Supreme Court of Canada decision of Vorvis v. Insurance Corp. of British Columbia.5 Mr. Vorvis was hired as a junior solicitor by I.C.B.C. in 1973. His supervisor became increasingly frustrated with Mr. Vorvis' pace of work. He implemented weekly productivity meetings which were aimed at making Mr. Vorvis work more quickly. However, Vorvis found these meetings so stressful that he had to seek medical attention. The supervisor decided that he had had enough and dismissed Vorvis. There was no culminating event. I.C.B.C. initially took the position that it had cause to terminate Vorvis for incompetence, but nevertheless offered to settle the case for eight months pay and benefits in exchange for a full and final release. Vorvis refused the offer and litigated. He found alternative employment seven months after termination.

The case eventually reached the Supreme Court of Canada which upheld the findings of the trial judge and the B.C. Court of Appeal that Vorvis was entitled to seven months notice for wrongful dismissal, but he was not entitled to compensation for mental distress, or aggravated or punitive damages. The Court reviewed the case law and concluded that these types of damages could only be awarded in breach of contract cases where there was a separate actionable wrong that formed the basis for such an award. Justice McIntyre found that wrongful termination of the employment relationship without proper notice was not a separate actionable wrong. Mr. Vorvis was entitled to damages for lost wages because I.C.B.C. failed to give proper notice, but the conduct of I.C.B.C. did not constitute a separate actionable wrong, and therefore no aggravated damages resulted.

It is worth noting that the Court refused to award aggravated damages even though it was highly critical of the employer noting,

While the conduct complained of, that of Reid [the supervisor], was offensive and unjustified, any injury it may have caused the appellant cannot be said to have arisen out of the dismissal itself. The conduct complained of preceded the wrongful dismissal and therefore cannot be said to have aggravated the damage incurred as a result of the dismissal. Accordingly, I would refuse any claim for aggravated damages in respect of the wrongful dismissal.6

Justice McIntyre did leave the possibility of aggravated damages, noting that he "would not wish to be taken as saying that aggravated damages could never be awarded in a case of wrongful dismissal, particularly where the acts complained of were also independently actionable, a factor not present here."7 The unfortunate result of this decision, however, was the conclusion that, no matter how badly an employer treated a worker in the time leading up to termination, if the termination itself was not carried out in a blameworthy fashion, aggravated damages were unlikely to be awarded.

Justice McIntyre similarly rejected the claim for punitive damages. While he did reject the limitations on punitive damages set out by the House of Lords in Rookes and Bamard,8 he found that such damages should be awarded very rarely in Canada. The Court noted,

When then can punitive damages be awarded? It must never be forgotten that when awarded by a judge or a jury, a punishment is imposed upon a person by a Court by the operation of the judicial process. What is it that is punished? It surely cannot be merely conduct of which the Court disapproves, however strongly the judge may feel. Punishment may not be imposed in a civilized community without a justification in law. The only basis for the imposition of such punishment must be a finding of the commission of an actionable wrong which caused the injury complained of by the plaintiff.9

In Vorvis, the Court did not find an actionable wrong, and the punitive damages case was therefore dismissed.

In the wake of Vorvis, punitive damages in wrongful dismissal claims were rare. One of the few exceptions is Ribeiro v. Canadian Imperial Bank of Commerce.10 When Mr. Ribeiro was dismissed on the basis of an allegation of fraud that turned out to be completely untrue, he was awarded $10,000 at trial. The Ontario Court of Appeal increased the award to $50,000. A very similar case involving the same defendant is Francis v. C.I.B.C.11 where the Court of Appeal increased punitive damages from $15,000 to $40,000 in a case where, based on a "shoddy and biased" investigation, the bank wrongfully accused Francis of fraud and serious moral turpitude.

There was little development in the law relating to bad faith or aggravated damages in contract in Canada until 1997 when the Supreme Court re-visited whether breaches of employment contracts could form the basis for punitive or aggravated damages. The Court also considered whether an employee should be allowed to sue for "bad faith discharge" in the seminal decision of Wallace v. United Grain Growers Ltd. (c.o.b. Public Press),12 In Wallace, the employer approached Wallace and asked him to leave his job of 25 years to work for U.G.G.. Wallace asked for, and received, assurances of fair treatment and remuneration and a promise that, if he performed as expected, he could work for U.G.G. until retirement. Wallace worked for U.G.G. from 1972 until August 1986 when he was summarily discharged without explanation. Wallace was U.G.G.'s leading salesperson and his supervisors had recently complimented him on his work. However, the employer alleged in its termination letter and in its Statement of Defence that Wallace was unable to perform his duties satisfactorily and termination for cause was justified. Wallace was devastated by the allegations and had to seek psychiatric help. Almost 59 years old and terminated for alleged cause, Wallace found it difficult to find similar employment.

At the beginning of trial, the employer withdrew the termination for cause argument. The trial judge awarded damages based on a 24-month notice period and also aggravated damages. The Manitoba Court of Appeal reduced the notice period to 15 months and overturned the aggravated damages. The Supreme Court returned the notice period to 24 months, but refused to allow a separate award for aggravated damages.

The reasons of Mr. Justice lacobucci, writing for the majority, are interesting. Relying on Vorvis, the majority concluded that neither the dismissal nor the events surrounding the dismissal constituted a separate actionable wrong in either tort or contract, and therefore neither punitive nor aggravated damages could be awarded. This position was based on the conclusion that an employee does not contract for "peace of mind" in an employment contract.13

This conclusion would suggest that the Court was not prepared to provide Wallace with a remedy for the treatment he had endured at the hands of his employer; however, Justice lacobucci went on to discuss the relationship between good faith conduct and the reasonable notice period. He rejected the argument that an employee could sue for bad faith discharge, but then went on to observe,

The appellant urged this Court to recognize the ability of a dismissed employee to sue in contract or alternatively in tort for "bad faith discharge". Although I have rejected both as avenues for recovery, by no means do I condone the behaviour of employers who subject employees to callous and insensitive treatment in their dismissal, showing no regard for their welfare. Rather, I believe that such bad faith conduct in the manner of dismissal is another factor that is properly compensated for by an addition to the notice period.14

The underlying rationale for the Court's ruling was the recognition that an employment contract is usually not the product of negotiations between equals. Individuals lack the bargaining power and the information necessary to bargain, and the Court recognized that employees were a "vulnerable group." The time when an employee is terminated is, moreover, the time when he or she is normally the most vulnerable and in need of protection. Consider the following passage, which although lengthy, sets out with crystal clarity, the special obligations the Supreme Court places on parties who contract with the weak and vulnerable. The Court refuses to apply traditional contractual limits on damages to employment cases, and rejects decisions supporting that interpretation, noting

Although these decisions are grounded in general principles of contract law, I believe, with respect that they have failed to take into account the unique characteristics of the particular type of contract with which they were concerned, namely, a contract of employment. Similarly, there was not an appropriate recognition of the special relationship which these contracts govern. In my view, both are relevant considerations.

The contract of employment has many characteristics that set it apart from the ordinary commercial contract. . . . As K. Swinton noted in "Contract Law and the Employment Relationship," ... .

…the terms of the employment contract rarely result from an exercise of free bargaining power in the way that the paradigm commercial exchange between two traders does. Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.

This power imbalance is not limited to the employment contract itself. Rather, it informs virtually all facets of the employment relationship. In Slaight Communications v. Davidson, [1989] 1 S.C.R. 1038, Dickson C.J. ... quoted with approval from P. Davies et al. Labour and the Law (3rd ed. 1983), at p. 18:

[T]he relation between an employer and an isolated employee or worker is typically a relation between a bearer of power and one who is not a bearer of power. In its inception ills an act of submission, in its operation it is a condition of subordination ...

This unequal balance of power led the majority of the Court in Slaight ... to describe employees as a vulnerable group in society. The vulnerability of employees is underscored by the level of importance which out society attaches to employment....

Thus, for most people, work is one of the defining features in their lives. Accordingly, any change in a person's employment status is bound to have far-reaching repercussions. ... The point at which the employment relationship ruptures is the time when the employee is most vulnerable and hence, most in need of protection. ... the law ought to encourage conduct that minimizes the damage and dislocation ... that result from dismissal. ... the loss of one's job is always a traumatic event. However, when termination is accompanied by acts of bad faith in the manner of discharge, the results can be especially devastating. ... to ensure employees receive adequate protection, employers ought to be held to an obligation of good faith and fair dealing in the manner of dismissa1.15

The entire doctrine of contractual good faith obligations in Canada flows from the recognition that the Courts have a duty to protect the vulnerable and the weak who enter into contracts, but who cannot defend themselves when those contracts are breached. This definition is equally applicable to the wrongfully-terminated employee , the victim of a motor vehicle accident, and the disabled individual who is being denied coverage under an insurance policy.

It follows therefore that while in normal situations damages in contract for unreasonable conduct and emotional upset are not compensable, in wrongful dismissal litigation,

However, where an employee can establish that an employer engaged in bad faith conduct or unfair dealing in the course of dismissal, injuries such as humiliation, embarrassment and damage to one's sense of self-worth and self-esteem might all be worthy of compensation depending upon the circumstances of the case. In these situations, compensation does not flow from the fact of dismissal itself, but rather from the manner in which the dismissal was effected by the employer.
Often the intangible injuries caused by bad faith conduct or unfair dealing on dismissal will lead to difficulties in finding alternative employment, a tangible loss which the Court of Appeal rightly recognized as warranting an addition to the notice period. It is likely that the more unfair or in bad faith the manner of dismissal is the more this will have an effect on the ability of the dismissed employee to find new employment. However, in my view the intangible injuries are sufficient to merit compensation in and of themselves. I recognize that bad faith conduct which affects employment prospects may be worthy of considerably more compensation that that which does not, but in both cases damages have resulted that should be compensable.16

In the Wallace case, the abrupt manner of termination, the conscious decision of the employer to play "hardball" with Wallace, the wrongful allegation of cause, and the fact that the employer allowed rumours of alleged wrongdoing to circulate all contributed to a finding of an increased notice period based on bad faith. The Court rejected arguments that it was placing onerous obligations on employers, concluding that treating people fairly, reasonable and decently at a time of trauma and despair was something that every reasonable person, and the law, should expect.17

It was only after these principles concerning protection of the weak and vulnerable had been entrenched into Canadian law through Vorvis and Wallace, that the obligation of good faith dealing found its way into insurance litigation in the landmark case of Whiten v. Pilot Insurance Co.18 Whiten has already been the scope of detailed and lengthy analysis in other papers,19 and it is beyond the scope of this paper to discuss the facts and concepts relating to that case here. However, it is worth noting that the starting point for the legal analysis, which led to the spectacular result in Whiten, started with the employment cases we have examined in detail in this paper; specially Vorvis and Wallace.20 Like employment contracts, insurance contracts deal with relationship between the powerful and the weak, the rich and the vulnerable, the aggressive and the frightened. While there is surprisingly little discussion about this in Whiten, a close reading of the supporting jurisprudence leaves little doubt that the extra-ordinary obligations placed on the insurer to proceed fairly and in good faith flow from the power-imbalance of the respective parties.

Consider, for instance, the fact that the majority in Whiten assesses the punitive award by looking, inter alia, at whether the award is "Proportionate to the Degree of Vulnerability of the Plaintiff."21 Justice Binnie equates an insurance company's abuse of a vulnerable victim to a physician who uses access to drugs to purchase sex from a female patient. Vulnerability, by definition,

mitigates against the award of punitive damages in most commercial situations, particularly where the cause of action is contractual and the problem for the court is to sort out the bargain the parties have made. Most participants enter the marketplace knowing it is fuelled by aggressive pursuit of self-interest. Here, on the other hand, we are dealing with a homeowner's 'peace of mind' contract.22

The emergence of the good faith, aggravated and punitive damages doctrine appears to be, to a significant extent, a recognition and response to the fundamental inequality of adhesion contracts by the judiciary.

This brings us at long last to the subject matter of this paper, the Keays v. Honda Canada decision. The Keays decision is perhaps the most important bad faith case to be released since Whiten, yet appears to have been largely ignored. The facts of the case are interesting. Keays began working for Honda in 1986, but started to suffer from chronic fatigue syndrome ("CFS") shortly thereafter, although the disability was not diagnosed until 1997. Justice McIsaac found Keays to be an "exemplary employee" in all respects except for one. Due to his disability, Keays had an ongoing, well-documented problem with attendance. Keays went off on disability from 1996 to 1998, but then returned to work against his doctor's advice when his LTD carrier terminated benefits.23 Mr. Keays was able to function for a short time, but his absences due to CFS soon increased. Honda advised him of a program that purported to exempt employees from attendance-related progressive discipline, but the program was not suitable for CFS-sufferers as it required each absence to be medically validated and required medical confirmation of disability prior to each return to work. Honda demanded that a company doctor examine Keays, and he complied. During that examination, the doctor threatened to move Keays back to the production line. Matters continued to deteriorate to the point where Keays retained counsel to assist him in dealing with Honda. The lawyer wrote a conciliatory letter in March 2000 aimed at resolving differences with Honda. In fact, Honda had an unwritten policy against third party advocates and ignored the letter. Even though Keays had requested matters go through his lawyer, Honda continued to insist that it would only deal with Keays. In retaliation against Keays for hiring a lawyer, Honda cancelled its accommodation program and demanded Keays meet with another company doctor. Honda wrongly implied that both company doctors believed Keays was capable of returning to work. Through counsel, Keays requested more information about the examination. He was terminated.

After a twenty-nine day trial, Mr. Justice McIsaac found for Keays, awarding him 15 months notice based on service and circumstances. In addition he was awarded an additional nine months wages due to Honda's bad faith condition, and he was entitled to a further punitive award of $500,000.

McIsaac, J. was highly critical of Honda's conduct throughout the entire affair. He found Honda's in-house counsel blatantly breached R. 6.03(7) of the Rules of Professional Conduct by meeting with Keays when he was represented by Counsel. He found Honda refused to recognize the legitimacy of his disability. They unilaterally withdrew their feeble attempt at accommodation in retaliation for Keays retaining counsel, which was a blatant violation of the reprisal provisions of the Ontario Human Rights Code.24 Honda failed to disclose important evidence until well into the trial. This evidence, a letter from one of the doctors, revealed a "twisted view" of Keays' condition and was "a callous and insensitive misrepresentation of the medical information available to Honda at the time."25 The trial judge found Honda's actions caused real harm, noting,

There is uncontradicted evidence that, as a result of the insensitive manner of his termination, Mr. Keays suffered significantly. All that he was seeking from Honda was a reasonable accommodation for his disability and, in the result, he was terminated. He had attempted to resolve the impasse by retaining counsel who had expertise in these matters but Honda refused to reciprocate. His lawyer attempted to negotiate a reasonable resolution of the difference between the parties but Honda continued to threaten him with termination from the job he loved unless he agreed unconditionally to meet with Dr. Brennan. His condition worsened as a result and he became depressed. He stayed in bed up to sixteen hours per day. He was eventually granted a C.P.P. pension for totally disability, retroactive to the date of termination. He has been unable to work since the date of his termination. He has experienced a substantial loss of self-esteem because his job gave him not only a purpose in life, it also permitted him financial independence which is now gone.26

The trial judge concluded that Honda was guilty of "egregious bad faith" in the manner of termination, which caused adverse medical consequences, which is why he increased the notice period from 15 to 24 months. The Judge dismissed claims for intentional infliction of nervous shock and emotional distress as he felt that the "Wallace bump-up" covered this head of damages. The Judge reluctantly dismissed the separate claim for damages in tort for discrimination and harassment because he felt he was still bound by Seneca v. Bhadauria27, which holds that only the Ontario Human Rights Commission has jurisdiction to make findings in this area. The Judge also denied the claim for lost disability benefits because the Judge characterized this claim as an aggravated damages claim, which was not pleaded by Keays and was therefore not available.

While the trial judge was precluded from awarding a remedy for discrimination and harassment directly, he dealt with the matter indirectly by finding Honda's treatment of Keays, constituted an independent actionable wrong which warranted a punitive award of $500,000. The Judge found repeated examples of improper actions, failures to accommodate, unprofessional behaviour and other blameworthy conduct carried out by Honda and its agents. He concluded,

I have no difficulty in finding that the plaintiff has proved that Honda committed a litany of acts of discrimination and harassment in relation to his attempts to resolve his accommodation difficulties. When he began to push them on his concerns by having his lawyer attempt to advocate for him, they imposed the most drastic form of harassment possible: they terminated him.28

Interestingly, McIsaac, J. notes that he wants to make it clear that only the discrimination and harassment are being used as independent actionable wrongs to ground the case for punitive damages and the bad faith conduct of Honda is "not available for that purpose."29 However, this "anomaly" would not apply when the disability program is self-funded, which suggests that Justice McIsaac would not have a problem using a breach of the duty of good faith, as an independent actionable wrong to substantiate a punitive award against an insurance company.

The trial judge listed seven distinct reasons to support his finding that a $500,00030 punitive award was appropriate. Those findings are, sadly, all too often applicable against insurance companies in first party actions. The Judge found:

1. Honda's misconduct was planned and deliberate and formed a protracted corporate conspiracy against Keays;

2. Honda's intent in intimidating and terminating Keays was to deprive him of proper accommodation;

3. Honda's outrageous conduct persisted over five years without a hint of contrition;

4. Honda did not reveal some damaging evidence until day 22 of the trial;

5. Honda was aware of its obligation to accommodate and failed to do so and knowingly wrongfully terminated Keays as an act of retaliation for Keays asserting his rights;

6. Honda benefited from its misconduct because they rid themselves of a "problem" associate;

7. Honda knew Keays valued his employment greatly and knew he was dependent upon employment for disability benefits if he could not continue to work.

The Keays v. Honda Canada case is currently under appeal. Assuming the case holds up to review, it represents an important next incremental step in Canadian bad faith and punitive litigation. On a base judgment of 14 months wages, Keays was able to obtain nine months additional notice for bad faith conduct and/or aggravated damages. In addition, he recovered $500,000 in punitive damages due to Honda committing the independent actionable wrong of discrimination and harassment in contravention of the Ontario Human Rights Code.31 In Keays, unreasonable medical examinations, wrongful requests, reprisals, failure to fulfill obligations to a vulnerable claimant, knowingly inflicting emotional or financial suffering, hiding evidence, and engaging in planned and deliberate corporate conspiracy, all formed the basis for the punitive damages claim.

In my view, employment bad faith litigation and first party insurance litigation are more alike than dissimilar. Counsel seeking to reinvigorate this area of the law would benefit victims of both the workplace and the highway by making a concerted attempt to incorporate themes based on vulnerability, inequality of bargaining position, and power imbalance into future cases.

Thank you.


1 I would like to acknowledge the invaluable assistance of my law clerk, Lee-Ann Fournier who helped me research this paper and who put together the power point presentation.

2 [20051 O.J. No. 1145 (Ont. S.C); [2006] O.J. No. 560 (Ont. S.C.) (costs decision); decision is currently under appeal.

3 The cost decision of Keays is cited in Scafom Canada Inc. v. Ontario (Ministry of Labour), 2005 CanLII 21450 (Ont, L.R.B.), however that case cites the ruling on whether the trial judge should recuse himself for reasonable apprehension of bias and does not consider the bad faith elements of the main decision.

4 For interesting academic papers on the debate see Girard, "Good Faith in Contract Performance: Principle of Placebo?" (1983), 5 Supreme Court L.R. 309; Symposium, "Does Anglo-Canadian Contract Law Need a Doctrine of Good Faith?" (1984), 9 C.B. L.J. 385; Edward Balaba, "Good Faith in Canadian Contract Law" (Special Lectures of the Law Society of Upper Canada, 1985: Commercial Law: Recent Developments and Emerging Trends).

5 [1989] 1 S.C.R. 1085,58 D.L.R. (4th) 193 dismissing appeal from [1984] B.C.J. No. 1598 (B.C.C.A.) partially dismissing appeal from [1982] B.C.J. No. 1625.

6 Ibid., para. 23 [emphasis mine; passage is actually from Hinkson,J.A. in the Court of Appeal, at p.46, but McIntyre quotes with approval].

7 Ibid., para. 22.

8 [1964] A.C. 1129 where punitive damages were restricted to cases involving abuse of power by government and torts committed for profits. [Ibid., 1105].

9 Ibid., 1105-1106.

10 (1989), 67 O.R. (2d) 385,24 C.C.E.L. 225 (H.C.J.), varied at (1992), 13 O.R. (3d) 278.

11 (1994), 21 O.R. (3d) 75, 120 D.L.R. (4th) 393 (Ont. C.A.)

12 [1997] 3 S.C.R. 701 (S.C.C.), on appeal from (1995), 102 Man. R. (2d) 161, [1995] 9 W.W.R. 153, 14 C.C.E.L. (2d) 41 (Man. C.A.); allowing the appeal and cross-appeal from (1993), Man R. (2d) 161, [1993] 7 W.W.R. 525,49 C.C.E.L. 71 (Man. Q.B).

13 Ibid., para. 73 [This conclusion is, with respect, likely very debatable].

14 Ibid., para 88. It is worth noting three of the Supremes dissented on the question of "bad faith discharge" and would have gone so far as to hold the expectation of good faith in dismissing employees should be viewed as part of the contract of employment, and to therefore be the basis of actions in tort for bad faith discharge. [See reasons of McLachlin, J. generally and especially paragraphs 135-146].

15 Ibid., paras. 90-95.

16 Ibid., paras 103-104.

17 Ibid., para. 107.

18 [2002] 1 S.C.R. 595 (S.C.C.)

19 Most comprehensively at OTLA Bad Faith Conferences, I to IV.

20 Ibid., see especially paragraphs 31 and 78-80.

21 Ibid., para. 114-116.

22 Ibid., para. 115.

23 It appears that Mr. Keays did not litigate against the LTD carrier, as one of heads of damages he sought was the lost opportunity to pursue long-term disability benefits.

24 Keays, supra, para. 47

25 Ibid., para. 43

26 Ibid., para. 44.

27 [1981] 2. S.C.R. 181 (SCC) recently affirmed in Ontario in Taylor v. Bank of Nova Scotia [2005] O.J. No. 838 (Ont. C.A.) [Ibid., para. 50]

28 ibid., para. 57.

29 Ibid., para 58.

30 It is interesting to note that McIsaac, J. confirms that he is aware of the fact that OHRC decisions normally award only up to $10,000 for violations under the Code, but he is "not satisfied that the maximum penalty under the OHRC comes even close to an appropriate deterrence and denunciation of the outrageous and high-handed conduct of this defendant." [ibid., para 63] See also s.41(1)(b) of the OHRC.

31 The Plaintiff also received a 25% premium above his entire solicitor and client account at the cost hearing of this matter.