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26 February 2013
The Ontario Court of Appeal has confirmed that insurance sales brokers may be free to take their books of business to competing firms following the termination of their services. In addition to clarifying the law on unlawful conduct conspiracy and wrongful resignation, the decision in Gentech Insurance Ltd v Martina(1) confirms that – in the absence of an agreement to the contrary – an independent contractor is the sole owner of his or her own book of business.
Gentech Insurance Ltd was a small insurance brokerage whose standard practice was to deal with insurance sales brokers on the basis of a 50/50 commission and equity split. Gentech not only split all commissions with its agents evenly, but also considered itself the 50% owner of each broker's book of business. In the event that a broker sought to leave Gentech for another brokerage and to take the book with him or her, that broker would be required to purchase Gentech's 50% interest at "fair market value".
In 2005 Alan Martina joined Gentech as an insurance sales broker. At the time of joining, Martina had no book of business. On that basis, Gentech agreed to pay Martina a guaranteed draw and a higher proportion of commissions while he developed a book that would be jointly owned by Gentech. Martina orally agreed that he would pay fair market value for 50% of the book in the event that he ever left Gentech and wished to take the book with him. However, Martina and Gentech never entered into a written services agreement to that effect.
One year later Peter Diamantouros also joined Gentech as an insurance sales broker. Unlike Martina, Diamantouros had developed his own book of business before joining. While Diamantouros may have been aware of Gentech's 50/50 policy, he never agreed that Gentech would become a 50% owner of his book (although he did agree to the 50/50 commission split).
In 2008 Martina and Diamantouros simultaneously informed Gentech that they were leaving the brokerage, effective immediately. Neither broker provided Gentech with any notice of his departure; nor did he offer to purchase Gentech's purported interest in their respective books. Martina and Diamantouros joined a competing brokerage and began soliciting the clients from their books, thus resulting in significant financial loss to Gentech. Gentech subsequently brought an action against Martina and Diamantouros for damages on the grounds of breach of contract, unlawful conduct conspiracy and wrongful resignation.
At trial, the court found that Diamantouros was free to take his book of business to the competing brokerage. Diamantouros had never agreed to a 50/50 equity split in the book; therefore, Gentech had no cause of action against Diamantouros for breach of contract. On the other hand, Martina had orally agreed to pay fair market value for Gentech's half of the book. Accordingly, the trial judge held that Martina had no right of sole ownership in the book and ordered him to pay damages for breach of contract amounting to 50% of the market value of the book.
The trial judge also held that both agents had committed the tort of unlawful conduct conspiracy. Unlawful conduct conspiracy exists where unlawful conduct is directed towards a plaintiff, and the defendant perpetrating the conduct should have known that injury to the plaintiff was likely to and did in fact result. Martina's conduct was unlawful because he had taken his book of business contrary to his oral agreement with Gentech. Diamantouros was found to have unlawfully acted in unison with Martina when they planned their departure from Gentech and brought their books to the competing brokerage.
However, the trial judge dismissed Gentech's wrongful resignation claim on the grounds that none of the parties had entered into a contract requiring a specified period of notice of resignation.
On appeal, the Ontario Court of Appeal upheld the trial judge's decision insofar as it pertained to Martina. However, Diamantouros was absolved of all wrongdoing. Specifically, the appeal court clarified that a defendant does not commit unlawful conduct conspiracy unless he or she was engaged in the underlying unlawful conduct, or alternatively actually intended to cause harm to the plaintiff. In this case, Diamantouros owned his book of business and was entitled to leave Gentech without notice. Further, there was no evidence that Diamantouros's purpose of leaving for a competing brokerage was to cause harm to Gentech.
This case underscores the importance of written services agreements between employers and independent contractors and other non-employees. In the absence of an agreement to the contrary, independent contractors and other non-employees are free to terminate their employment without notice and may take their books of business with them. Therefore, employers are advised to enter into written services agreements with independent contractors and other non-employees that explicitly outline:
Employers are never wise to rely on written policies or longstanding practices regarding these matters. Indeed, the best way to safeguard against significant financial loss resulting from a resignation or lost book of business is to enter into a written services agreement with all independent contractors and other non-employees.
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