Is There a Duty on Employers to Remain Profitable?

A provocative question was asked this week: does an employer owe its employees a duty to remain profitable? That was the question that the Honourable Justice Edward Morgan of the Ontario Superior Court of Justice was asked to answer in the recently decided case of Lochran v. Duro-Test Canada Co., 2013 ONSC 706 (CanLII). Justice Morgan’s answer was no, it does not.

Background

Justice Morgan’s decision arises out a rather peculiar set of facts. Although the defendant employer entered a statement of defence and participated at all pre-trial procedural steps, it did not appear at trial. As Justice Morgan records in his reasons, the case then proceeded to a half-day trial, following which His Honour asked for submissions on the legal issue of whether the employer owed a legal duty to the plaintiff employee to ensure that it remains profitable so that the employee can continue to earn a high level of income as a salesman.

Facts of the Case

The defendant employer is a wholesaler and distributor of light bulbs and lighting fixtures. The plaintiff employee, Mr. Sam Lochran, is a sales representative whose income is on a commission basis depending on his annual sales.

The plaintiff’s largest customer for lighting equipment was Canadian Forces Base Borden (“Borden”). In order to supply equipment to Borden, his employer, Duro-Test, had to have a National Standing Offer (NSO), which was obtained by answering a tender from the federal Department of Public Works. The NSO was historically renewed on an annual basis, and more recently on an every-two-years basis.

According to Lochran, Duro-Test had successfully renewed the NSO for lighting equipment for roughly 30 years. Mr. Lochran had serviced the Borden account since 1994. Mr. Lochran was responsible for sales to Borden and other customers, but renewing the NSO, which was a condition precedent for selling to a federal institution such as Borden, was the responsibility of management.

In early 2005, Duro-Test failed to renew the NSO for lighting equipment. Mr. Lochran alleged that this was due to the Duro-Test management’s negligence. Justice Morgan found that it did appear that the NSO that year slipped through the cracks and that this occurred through no fault of Mr. Lochran.

In an effort to repair the situation, Duro-Test negotiated a Regional Standing Offer (“RSO”) later that year as a temporary solution. This allowed sales to Borden to re-start pending the next round of NSO renewals. The RSO became effective in mid-December 2005. Both Duro-Test and Mr. Lochran therefore missed the sales that they expected to make to Borden for the second, third, and fourth quarters of 2005.

Mr. Lochran limited his claim to the reduction in sales during last three quarters of 2005. It is this reduction that he alleged was caused by the defendant’s negligence in missing the renewal of the NSO.

Decision

In deciding that the employer did not owe a legal duty to its employee to remain profitable Justice Morgan wrote that:

[12]  In answer to my question about the Defendant’s duty of care, counsel for the Plaintiff points to the employment contract between the parties. That contract, dated January 20, 1994, establishes customer accounts such as the Borden account as a “Protected Account” for the Plaintiff. The contract assures the Plaintiff that he will not face competition from other sales representatives for this type of account.

[13]  The employment contract does not, however, guarantee any specific level of sales to Borden or to any other customer, whether that customer is a “Protected Account” or not. Indeed, the Defendant could not possibly have guaranteed any particular level of sales to any given customer. If sales were guaranteed, the Defendant would not need to hire a commission-earning sales force.

[14]  The Plaintiff concedes that it was up to him to work with the customer and to generate the sales. He submits that what the Defendant had to do is provide the products and, for Borden, the NSO.

[15]  The failure to renew the NSO in 2005 was not a breach of contract by the Defendant. [Emphasis added.]

Justice Morgan therefore concluded that Mr. Lochran had no claim for breach of contract, such that if he was to have a claim at all, it would have to lie in tort. In order to be successful in tort, Mr. Lochran would first have to show that his employer owed him a legal duty.

Justice Morgan could find no authority for the proposition that the employer owed such a duty, and, according to Justice Morgan’s reasons for decision, plaintiff’s counsel proffered no such authority to him.

In the result Justice Morgan dismissed the plaintiff’s claim. His Honour did so for two reasons: first, he was unable to find any duty being owed to the plaintiff, and second he found that the plaintiff had failed to prove his damages.

Commentary

The case presents an interesting question in these economic times. Where a commissioned sales person’s income is reduced as a result of a demonstrable error by the employer, such as was the case here, can the employee hold the employer responsible?

I cannot help but recall the decision of the Supreme Court of Canada in Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 (CanLII).

In Wise the issue to be resolved was whether directors of a near-bankrupt corporation owed a fiduciary duty to the corporation’s creditors comparable to the statutory duty owed to the corporation. The Supreme Court of Canada held in that case that, directors owe a duty of care to creditors, but that duty does not rise to a fiduciary duty.

In commenting upon the assessment of whether a board of directors was acting in accordance with its duty to act in the best interest of the corporation Justices Major and Deschamps wrote that:

We accept as an accurate statement of law that in determining whether they are acting with a view to the best interests of the corporation it may be legitimate, given all the circumstances of a given case, for the board of directors to consider, inter alia, the interests of shareholders, employees, suppliers, creditors, consumers, governments and the environment. (Para. 42.) [Emphasis added.]

However, in the seminal point of the Wise decision, Justices Major and Dechamps went on to add that:

The various shifts in interests that naturally occur as a corporation’s fortunes rise and fall do not, however, affect the content of the fiduciary duty under s. 122(1)(a) of the [Canada Business Corporations Act].  At all times, directors and officers owe their fiduciary obligation to the corporation. The interests of the corporation are not to be confused with the interests of… any other stakeholders. (Para. 43.) [Emphasis added.]

Returning to the point, Wise tells us that directors of a corporation owe a duty to the corporation and no other stakeholder; and while those directors may consider the interests of employees of that corporation, they are not bound to and more to the point cannot elevate the employees’ interest above that of the corporation. Fine. Whatever my thoughts on this statement of law, the fact remains that in Mr. Lochran’s case the corporation’s interest and the employee’s interest were not at odds; they were the same.

What that means, though, is that while those with an interest in the corporation could have successfully brought a case against Duro-Test for its failure to renew the NSO, Mr. Lochran is not afforded any such remedy. To me, this reality is the failing of not only the decision in Wise, but the entire corporate structure: shareholders, employees, suppliers, creditors, consumers, governments and the environment are but a short list of those to whom the corporation owes only a secondary duty.

Should Justice Morgan have found that employers owe a duty at law to remain profitable? My answer is yes. While such a duty may undoubtedly create a slippery slope whereby employees dismissed from failing businesses could claim damages from corporation management, one must remember that there are more elements to a case of negligence than just “duty,” and I fail to see how a finding of a duty to remain profitable is disconnected to the duty found in Wise.

True, in this case Mr. Lochran would still have had to prove his damages, which appears to be where his case may have fallen down, but the fact remains that the case presented an interesting opportunity for the court to find such a duty owing at law. It will be interesting to see if it is appealed.

Question

I leave readers with these questions, to which I invite responses in the comments section below: should the court have found a legal duty to remain profitable? Why?