Introduction

Key employees are crucial to the success of any organisation. They are the top performers and the faces of the company – entrusted with authority and autonomy to execute their duties. Inherent in any such relationship is trust.

M-I Drilling Fluids Canada Inc v Cottle (2018 ABQB 143) concerned a key employee who broke this trust by profiteering for several years from kickbacks while the employer paid inflated prices for supplies. When the fraud was discovered, the employee was fired. However, termination alone may be cold comfort to an employer that has suffered losses from fraud. Can anything else be done?

Facts

Defendant Mr C was an employee of plaintiff M-I Drilling Fluids Canada Inc (MID). C worked his way up to become a high-level manager, operating with significant discretion and minimal supervision.

C repeatedly certified that he had read and agreed to the company's code of ethics, which prohibited him from receiving payments from suppliers without first obtaining permission from MID.

C did not follow the code. Unbeknown to MID, between May 2009 and September 2013, C received kickbacks from two MID suppliers, one of which was defendant Ingeveld and Associates Ltd (IAL). In February 2012 MID discovered one of the IAL kickbacks and issued a written reprimand to C.

Despite the reprimand, C continued taking kickbacks without MID's knowledge. The scheme unravelled when another employee discovered evidence of additional kickbacks.

MID terminated C for cause and sued for the kickbacks.

Decision

Is termination an employer's only remedy? C claimed that MID's only remedy was termination for cause. He argued that in its 2012 reprimand, MID had represented that he would only be terminated if he failed to abide by the code in the future. As the reprimand made no reference to lawsuits, C assumed that the worst that could happen was termination. Based on this purported representation, C argued that MID was estopped from advancing its claim.

The court dismissed these arguments, holding that the reprimand neither released nor waived MID's remedies, including its right to sue. Further, the defence of estoppel failed since it required C to have "clean hands" before the court and, as he had been engaged in dishonest conduct, his hands were not clean. Termination was not MID's sole recourse against C – it was also entitled to advance a claim for its losses.

Causes of action to recover ill-gotten gains MID advanced multiple arguments in an effort to recuperate its losses. In particular, it claimed – and the court found – that C:

  • breached his common law duties of good faith, fidelity and loyalty by making secret profits based on his position and placing his personal interests in conflict with those of MID;
  • breached his fiduciary duties;
  • committed civil fraud by falsely implying to MID that the purchase of supplies was an arm's-length transaction and that the best price had been negotiated; and
  • committed civil conspiracy with IAL in order that MID would buy IAL supplies at inflated prices.

MID was awarded a disgorgement of C's profits from the kickback scheme. The underlying principle for the decision was that C should not enjoy the fruits of his misconduct. The court also found C's conduct to be malicious, oppressive and high-handed, and awarded punitive damages.

Comment

The following lessons can be learned from the decision:

  • Company codes of ethics and policies should include express provisions on conflicts of interest, with clear definitions, parameters and guidelines on how they are to be addressed.
  • Once the appropriate policies are in place, employees should certify that they have read, understood and agreed to them. MID did this, which enabled the court to conclude that C knew that what he was doing was wrong.
  • If a conflict of interest arises, conduct a thorough investigation. MID did not question whether C had received other payments in 2012 or whether other workers had knowledge of his scheme. Such details could have been discovered earlier in an investigation.
  • Be careful not to waive any rights when issuing reprimands and warnings. Employers should consider an express reservation of rights in written communications to prevent future arguments of waiver and estoppel.
  • Breach of contract, breach of fiduciary duty, civil fraud and civil conspiracy are claims that may be used in the appropriate case to recover ill-gotten gains and the courts may even impose punitive damages for wrongful conduct.

For further information on this topic please contact Theodore Fong at Fasken by telephone (+1 403 837 0610) or email ([email protected]). The Fasken website can be accessed at www.fasken.com.

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