Damages for Mental Distress in Employment Law Cases after Keays v. Honda Canada Inc.

The purpose of an award of damages in a wrongful dismissal action is to compensate
the employee for breach of the implied term of the employment contract to provide reasonable notice of termination. In the seminal case of Bardal v. Globe & Mail Ltd. (1960), 24 D.L.R. (2d) 140 (Ont. H.C.J.) McRuer, C.J.H.C. set out a list of factors to be considered in arriving at the appropriate notice period: “The reasonableness of the notice must be decided with reference to each particular case, having regard to the character of the employment, the length of service of the servant, the age of the servant and the availability of similar employment, having regard to the experience, training and qualifications of the servant.”

As a breach of contract claim however, the damages available in an employment law action have been subject to the strictures imposed by the courts in such cases, principally the restriction on an award of damages for mental distress. For over a century, creative lawyers have been attempting to get around these restrictions. In Addis v. Gramophone Co., [1909] A.C. 488 (H.L.), the door was slammed shut by the House of Lords. The Plaintiff had been a manager for the Defendant in Calcutta and was dismissed with the six months notice provided for in his employment agreement. A jury awarded additional damages for the humiliating manner of termination. Lord Loreburn stated: “If there be a dismissal without notice the employer must pay an indemnity; but that indemnity cannot include compensation for the injured feelings of the servant, or for the loss he may sustain from the fact that his having been dismissed of itself makes it more difficult for him to obtain fresh employment.”

This decision was highly influential and was followed by the Supreme Court of Canada inPeso Silver Mines Ltd. v. Cropper, [1966] S.C.R. 673. The case involved the dismissal of a corporate director of the Defendant mining company against whom unsubstantiated charges were made, harming the Plaintiff’s reputation in the mining community. The trial judge awarded damages for injury to the Plaintiff’s reputation. The award was set aside by the British Columbia Court of Appeal and the Supreme Court of Canada. Cartwright J. stated: “I agree with Bull J.A. that the claim being founded on breach of contract the damages cannot be increased by reason of the circumstances of dismissal whether in respect of the respondent’s wounded feelings or the prejudicial effect upon his reputation and chances of finding other employment.”

In Vorvis v. Insurance Corporation of British Columbia, [1989] 1 S.C.R. 1085, the Supreme Court of Canada had occasion to revisit the issue. While the Court backed away from a categorical rejection of an award of mental distress or aggravated damages, it was held that an independent actionable wrong would be required before such damages could be awarded. McIntyre J. stated: “From the foregoing authorities, I would conclude that while aggravated damages may be awarded in actions for breach of contract in appropriate cases, this is not a case where they should be given. The rule long established in the Addis andPeso Silver Mines cases has generally been applied to deny such damages, and the employer/employee relationship (in the absence of collective agreements which involve consideration of the modern labour law regime) has always been one where either party could terminate the contract by due notice, and therefore the only damage which could arise would result from a failure to give such notice. I 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.”

In a prescient dissenting decision, Wilson J. disagreed with this approach. Relying on the general principles of contractual damages from Hadley v. Baxendale (1854), 9 Ex. 341 (Ex. Ch.) Wilson J. held that where it could be shown to have been within the reasonable contemplation of the parties at the time the contract was entered into that mental distress would follow upon a breach of contract, such damages could be awarded. She stated: “I must respectfully disagree with my colleague’s view that conduct advanced in support of a claim for damages for mental suffering must constitute a separate ‘actionable wrong’ from the breach itself.”

Fast forward to 1997 and the Supreme Court of Canada again confronted the issue of damages in a wrongful dismissal action in Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701. While the Court expressly reaffirmed the holding of the majority in Vorvis, Iacobucci J. held that a dismissed employee who had been treated unfairly in the course of dismissal was not without a remedy. He proceeded to set out what later came to be known as the “Wallace bump up” representing an increase in the notice period for employees who could establish unfair or insensitive treatment by an employer at the time of termination. An award of aggravated or punitive damages was still reserved for cases where there was an independent actionable wrong.

In the course of his reasons, Iacobucci J. expressly rejected the Plaintiff’s request for recognition of the tort of bad faith discharge. This, he said, would be contrary to the longstanding right of the employer to terminate the contract without cause upon payment of reasonable notice: “A requirement of ‘good faith’ reasons for dismissal would, in effect, contravene these principles and deprive employers of the ability to determine the composition of their workforce. In the context of the accepted theories on the employment relationship, such a law would, in my opinion, be overly intrusive and inconsistent with established principles of employment law, and more appropriately, should be left to legislative enactment rather than judicial pronouncement.”

Insofar as damages for mental distress were concerned, Iacobucci J. stated that while there had been academic criticism of Vorvis, the proposition that an independent actionable wrong was required for compensation beyond reasonable notice was “an accurate statement of the law.” He stated that “this requirement necessarily negates the trial judge’s reliance on concepts of foreseeability and matters in the contemplation of the parties. An employment contract is not one in which peace of mind is the very matter contracted for (see Jarvis v. Swan Tours Ltd, [1973] 1 Q.B. 223 (C.A.)) and so, absent an independently actionable wrong, the foreseeability of mental distress or the fact that the parties contemplated its occurrence is of no consequence, subject to what I say on employer conduct below.”

Iacobucci J. went on to state that improper conduct by an employer in the course of dismissal was to be compensated for by an increase in the notice period. The rationale given for this is significant. Iacobucci J. referred with approval to the following statements, the first from Katherine Swinton in “Contract Law and the Employment Relationship: The Proper Forum for Reform” and the second from Dickson C.J. in Reference Re Public Service Employee Relations Act (Alta.), [1987] 1 S.C.R. 313:

“…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.”

“Work is one of the most fundamental aspects in a person’s life providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self-worth and emotional well-being.”

With these considerations in mind, Iacobucci J. acknowledged that “any change in a person’s employment status is bound to have far reaching consequences.” He stated that “The point at which the employment relationship ruptures is the time when the employee is the most vulnerable and hence, most in need of protection.” After citing a number of examples of bad faith conduct, Iacobucci J. concluded:

“In my view, there is no valid reason why the scope of compensable injuries in defamation situations should not be equally recognized in the context of wrongful dismissal from employment. The law should be mindful of the acute vulnerability of terminated employees and ensure their protection by encouraging proper conduct and preventing all injurious losses which flow from acts of bad faith or unfair dealing on dismissal, both tangible and intangible. I note that there may be those who would say that this approach imposes an onerous obligation on employers. I would respond simply by saying that I fail to see how it can be onerous to treat people fairly, reasonably and decently at a time of trauma and despair. In my view, the reasonable person would expect such treatment. So should the law.”

These strong statements notwithstanding, it remained the case after Wallace that, in the absence of an independent actionable wrong, improper conduct by an employer was to be compensated for by an increase in the notice period, not by an award of damages for mental distress or aggravated damages.

That is how matters remained until the Supreme Court of Canada released its long awaited decision in Keays v. Honda Canada Inc., [2008] 2 S.C.R. 362, in which the Court once again had occasion to revisit fundamental questions of damages in employment law cases. Mr. Keays had been a long-term employee at Honda who was required to go off work on sick leave due to chronic fatigue syndrome. When he refused to continue to provide doctor’s notes or to meet with a physician retained by the employer, he was dismissed by Honda. This conduct did not find favour with the trial judge, McIsaac J. He awarded Mr. Keays notice equivalent to 15 months, increased to 24 months on account of the Wallace bump up, as well as punitive damages of $500,000.00.

Not surprisingly, the decision was appealed by Honda. In a 2-1 decision, the Court of Appeal for Ontario upheld the punitive damage award but the majority reduced it to $100,000.00, while Goudge J.A. in dissent would have retained the award. Both the majority and dissenting judges agreed that a breach of the Human Rights Code, such as was found by the trial judge, was sufficient to create the independent actionable wrong necessary to trigger the right to claim aggravated or punitive damages.

Mr. Keays did not do well at the Supreme Court of Canada. The Court held that the trial judge had made palpable and overriding errors of fact which infected the Wallace damages and punitive damage award. Those were set aside, as was the order for substantial indemnity costs. The Court did not stop there however, but rather took the opportunity to revise the approach to the award of Wallace damages and damages for mental distress in employment law cases. Having regard to the historical overview referred to above, it is the Court’s approach to mental distress damages which seems to me to be the issue meriting the closest scrutiny.

The Court’s approach to this issue cannot be understood without reference to the earlier decision of the Court in Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3. In Fidler, which involved breach of a long-term disability contract, the Court returned to the analysis of contractual damages in Hadley v. Baxendale and held that damages for mental distress could be awarded if, to quote from Hadley, they were “such as may fairly and reasonably be considered either arising naturally from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties.” It was no longer the case that mental distress damages would only be available in “peace of mind” contracts, but rather could be awarded for the breach of any contract provided the test in Hadley was met. The Court stated:

“In normal commercial contracts, the likelihood of a breach of contract causing mental distress is not ordinarily within the reasonable contemplation of the parties. It is not unusual that a breach of contract will leave the wronged party feeling frustrated or angry. The law does not award damages for such incidental frustration. The matter is otherwise, however, when the parties enter into a contract, an object of which is to secure a particular psychological benefit. In such a case, damages arising from such mental distress should in principle be recoverable where they are established on the evidence and shown to have been within the reasonable contemplation of the parties at the time contract was made. The basic principles of contract damages do not cease to operate merely because what is promised is an intangible, like mental security…”

This does not obviate the requirement that a plaintiff prove his or her loss. The court must be satisfied: (1) that an object of the contract was to secure a psychological benefit that brings mental distress upon breach within the reasonable contemplation of the parties; and (2) that the degree of mental suffering caused by the breach was of a degree sufficient to warrant compensation. These questions require sensitivity to the particular facts of each case.”

Building upon the principles in Fidler, Bastarache J. in Keays explained how these principles would be applied in the employment law context. He began by re-emphasizing that the employment contract is by its nature subject to cancellation on notice and thus “At the time the contract was formed, there would not ordinarily be contemplation of psychological damage resulting from the dismissal since the dismissal is a clear legal possibility. The normal distress and hurt feelings resulting from dismissal are not compensable.” That, however was not the end of the matter. The Court had already held in Wallace that employers had “an obligation of good faith and fair dealing in the manner of dismissal” and thus at least since Wallace, it could be said that this obligation was part of the employment contract. Accordingly, the reasonable expectation of the parties would be that employers be “candid, reasonable, honest and forthright with their employees” in the course of dismissal. Failure to abide by this standard “can lead to foreseeable, compensable damages.”

As a result, the types of conduct which have been the subject of extension of the notice period by way of a Wallace bump up can now be the basis of damages for mental distress. Since Wallace damages now serve no useful purpose, they are not to be awarded. Instead, damages beyond the notice period must be shown to have been within the contemplation of the parties at the time the contract was entered into and to have arisen from the manner of termination.

“Thus, if the employee can prove that the manner of dismissal caused mental distress that was in the contemplation of the parties, those damages will be awarded not through an arbitrary extension of the notice period, but through an award that reflects the actual damages. Examples of conduct in dismissal resulting in compensable damages are attacking the employee’s reputation by declarations made at the time of dismissal, misrepresentation regarding the reason for the decision, or dismissal meant to deprive the employee of a pension benefit or other right, permanent status for instance (see also the examples in Wallace at paras. 99-100.)”

It must be said that when the Keays decision was released in June 2008, much of the commentary was to the effect that the decision was a major victory for employers. There is no doubt that abolition of the Wallace bump up and extension of the notice period removes a thorn in the side of employers. It seems to me however, that the significance of the Court’s reasoning on mental distress cannot be overemphasized. The longstanding prohibition on the award of damages for mental distress in employment law actions no longer exists. It remains to flesh out the parameters of the decision and to observe the willingness of courts to award damages for mental distress in the employment law context. An important question to look out for is: what degree of employer misconduct will the courts require before making an award of damages for mental distress. Creative lawyers will undoubtedly be pursuing this question.