COURT OF APPEAL FOR ONTARIO
AUSTIN, MOLDAVER AND BORINS JJ.A.
BETWEEN: )
KURT FELKER ) Blair W. M. Bowen
) for the Defendants/Appellants
(Plaintiff/ )
Respondent) )
and )
SHERMAN CUNNINGHAM and ) Patrick G. Morris
ELECTRO SOURCE INC. ) for the Plaintiff/Respondent
(Defendants/ )
Appellants) ) Heard: May 18, 2000
On appeal from the judgment of Justice Casimir N. Herold dated October 15, 1998.
BORINS J.A.
1This is a wrongful dismissal case. Herold J. found that Electro Source Inc. dismissed Kurt Felker without cause. He awarded Felker damages of almost $100,000. Electro Source has appealed. It submits that the trial judge erred in failing to find that as a key employee who owed a fiduciary duty to his employer, Felker breached that duty when he engaged in contract negotiations with another company without the knowledge or consent of his employer, thereby putting his own interests before those of his employer and providing the employer with just cause for his dismissal. For the reasons that follow, I agree with the appellant’s position and would allow the appeal.
Facts
2As the trial judge observed, the facts were not seriously in dispute. The issue, however, was what result should flow from the facts.
3Electro Source carries on business as a sales agent for manufacturers of components in the electronics industry. Its president, sole shareholder and director is Sherman Cunningham. He met Felker in the summer of 1995. They shared a golf cart while participating in a golf tournament. At that time, Felker was an employee of Tech-Trek, a competitor of Electro Source. Felker had ambitions of owning and operating his own sales agency in the electronics industry. In 1994 he had incorporated a company, JAS Technology Inc. (“JAS”), which he intended to use to start his own business should the opportunity arise.
4In conversation with Cunningham that day, Felker disclosed that he would be prepared to leave Tech-Trek if the right opportunity presented itself as he saw little prospect of advancement. He also told Cunningham that he “had aspirations” of starting his own manufacturers’ sales agent company in the future. Although Cunningham was impressed with Felker, there were no available positions with Electro Source at that time.
5Later that autumn when a senior sales position became available in Electro Source’s Toronto office, Cunningham recalled his conversation with Felker and contacted him to see if he would be interested in the position. After three or four meetings, Felker agreed, pursuant to the terms of a written contract, to accept the position of Toronto Area Sales Manager for Electro Source at an annual salary of $130,000. Paragraph 7 of the contract provided that “should the need for termination arise, an 8 month notice would be required unless otherwise mutually agreed by both parties”. Felker commenced his employment on December 4, 1995.
6While employed by the appellant, Felker learned of an opportunity to become the manufacturer’s representative in Canada for a company known as Microchip. Felker and two partners, Cammuso and Bowden, put together a proposal on behalf of Felker’s company, JAS, which they planned to submit to Microchip in the expectation of gaining a substantial client who would get their own business started. Some years earlier, Electro Source had had discussions with Microchip about representing its product lines. However, it did not pursue the discussions when it learned that Microchip manufactured a product that competed with a product manufactured by one of its clients.
7The evidence indicated that Felker prepared a “power point” presentation on the Compaq notebook computer he had received from Electro Source under the employment contract. In his testimony, Felker admitted that he did not devote his full time and attention to his duties at Electro Source while preparing the presentation to Microchip and that he was not concerned about advancing the business of Electro Source during this period. He advised Cunningham in a memo dated March 20, 1996 that he would be spending more time out of the office on sales. Subsequent to the date of the memo, Cunningham noticed Felker’s absence from the office until the time Felker was terminated. Felker did not disclose to Cunningham that he was pursuing the Microchip opportunity, nor did he receive Cunningham’s permission to do so. He admitted that he was not frank, open and honest with Cunningham in that regard.
8Felker was to make his presentation to Microchip on April 9, 1996. On April 4, Cunningham learned of Felker’s activities. He testified that he did not confront Felker as confrontation was not his management style. Rather, he preferred that Felker come forward and be honest and open with him about his activities concerning Microchip. When Felker failed to come forward, Cunningham realized that he could no longer trust him and decided to terminate Felker’s employment. He did so on April 8, 1996.
9Although Felker made the proposal to Microchip, it was not accepted. Had it been accepted, Felker would have left his employment with Electro Source to operate his own company, JAS, in competition with Electro Source.
The trial judge’s reasons
10Herold J. described Felker as Cunningham’s “valuable and trusted key employee”. He added:
Both Messrs. Felker and Cunningham agree that Mr. Felker was a key, valued and trusted employee of Electro Source. Indeed, it is this characterization of Mr. Felker … which gives [Electro Source], in its submissions, grounds for dismissal.
11The following are the trial judge’s reasons for finding in favour of Felker:
The defence relies, to a considerable extent, on the long and persuasive or binding list of cases which require of an employee such as Mr. Felker, “due and faithful discharge of his duties”, a failure of which would lead to an understandable and possibly irreparable loss of trust and would, in most cases, justify dismissal for cause. [Authorities omitted.]
It is not these legal principles with which the plaintiff takes issue, but rather their applicability to the facts of this case. I agree with the plaintiff’s submission that they simply do not apply to the facts, as we know them.
That which distinguishes Mr. Felker’s situation from the situation of most other employees in similar circumstances, is that both he and Mr. Cunningham knew that any employee of a manufacturers representative in the electronics industry who was worth his salt would aspire to and, with any degree of luck succeed in achieving, his own manufacturers representative company. Not only did Mr. Felker and Mr. Cunningham know this, and Mr. Cammuso agree that this was so, but Mr. Felker had told Mr. Cunningham of this fact even before Cunningham had approached him about coming to work for Electro Source.
The only surprise, if indeed there was one, would be with respect to the timing of the presentation of the significant opportunity to Mr. Felker.
….. [Cunningham] was annoyed, even offended, by the fact that Mr. Felker was “going behind his back” to make the proposal to Microchip, but this is exactly what he knew Mr. Felker would do if the situation presented itself and while he might well have been understandably upset, he was not in my view, in the particular circumstances of this case, justified in terminating Mr. Felker unless he was prepared to abide by the provisions of paragraph 7 of the Conditions of Employment [by giving him eight months notice]. [Emphasis in the original.]
Issue
12It is the appellant’s position that although the trial judge found that Felker was a key, valuable and trusted employee, he made no finding concerning the nature of the relationship between Felker and Electro Source. The appellant submits that based on the trial judge’s finding, and the evidence, the trial judge erred in failing to find that Felker stood in a fiduciary relationship to Electro Source: Canadian Aero Service Ltd. v. O’Malley (1973), 1973 23 (SCC), 40 D.L.R. (3d) 371 (S.C.C.). As well, the trial judge made no findings concerning the duties owed by Felker as a fiduciary employee to Electro Source. Had he done so, it was submitted that the trial judge was bound to find that Felker was in breach of his fiduciary duties by pursuing a business opportunity with Microchip without making full disclosure to Electro Source and obtaining its consent.
13Although the appellant is correct that these findings were not made expressly by the trial judge, it is apparent from his reasons that he was alert to the nature of Felker’s relationship to Electro Source and that he had found that Felker stood in a fiduciary relationship to Electro Source and that he owed his employer the duty to make full disclosure of his pursuit of the Microchip opportunity. The issue, therefore, was whether Felker’s statement to Cunningham of his future aspiration to own his own business, made several months before there was an employee-employer relationship, satisfied the fiduciary duties to which Felker was subject during the period of his employment.
Analysis
14Since Canadian Aero it has been established law in Canada that high echelon managers and directors of an organization owe their employer a fiduciary obligation that transcends their implied duty of fidelity as a regular employee. Thus, an employee who stands in a fiduciary relationship to his or her employer has an equitable obligation of loyalty, good faith, honesty and avoidance of conflict of duty and self-interest. The employee must act honestly, in good faith and with a view to advancing the employer’s best interests. This court has held that fiduciary employees cannot enter into engagements in which they have a personal interest that conflict with anything the employer does, or realistically may do, without first making full disclosure and obtaining the employer’s consent: Manley Inc. v. Fallis (1977), 1977 3487 (ON CA), 2 B.L.R. 277. Moreover, as the fiduciary duty is based on trust, loyalty and confidence, and not economic cost to the employer, fiduciary employees are not relieved of their fiduciary duties if the business opportunity sought to further their own ends is one that the employer would have been unwilling or incapable of exploiting: Re Berkey Photo (Canada) Ltd. v. Ohlig (1983), 1983 1645 (ON SC), 43 O.R. (2d) 518 at 530-531 (H.C.J.).
15The trial judge found as a fact that Felker was a “valuable and trusted key employee” of Electro Source. There is no doubt that this finding was supported by the evidence. Felker joined Electro Source to “run the company”, being responsible for its sales in the Toronto area and the day-to-day operation of the Toronto office. Toronto was the key revenue region for the company. He acted in a managerial capacity and reported to its president and sole shareholder, Cunningham.
16In my view, given the trial judge’s finding that Felker was a key, valuable and trusted employee and taking into account the duties he performed, Felker was a fiduciary employee whose duty of loyalty required that he devote his full time, ability and energy to furthering the best interests of Electro Source. The duty to avoid conflict of interest and self-interest required Felker to avoid putting himself in a position where his own interests, or other commercial interests with which he was aligned, would be paramount to Electro Source’s interests or would detract from his ability to work fully and completely for the benefit of Electro Source. Moreover, Felker’s duty of good faith required that he be open, honest and forthright with Electro Source and make full disclosure of all material facts that, as his employer, it would be entitled to know to successfully operate its business.
17In this regard, Felker was required to make full disclosure to Electro Source that he was engaged in preparing a presentation to Microchip, with the intention of acquiring Microchip as a client for his fledgling company and, thereafter, carrying on a business in competition with Electro Source. In my view, Felker was in breach of his fiduciary duties when he failed to do so. The only way that Felker could have pursued the Microchip opportunity while an employee of Electro Source without being in breach of his fiduciary duties, would have been to make full disclosure to Electro Source and obtain its consent to do so.
18This brings me to the main issue. It is little wonder, when he learned of Felker’s closet plan to acquire the Microchip opportunity, that Cunningham lost trust in Felker and made the decision to terminate his employment. Although the trial judge recognized that Felker had acted improperly by “going behind [Cunningham’s] back”, he concluded that Electro Source was not justified in dismissing him for cause based on a casual comment which he had made to Cunningham several months earlier at a time when an employment relationship between Electro Source and Felker was not in their contemplation and long before the Microchip opportunity presented itself.
19It may be, as the trial judge found, that in view of these comments, Cunningham was aware that Felker would start his own manufacturers’ representative business if the opportunity to do so presented itself. However, this did not relieve Felker from his fiduciary duties when that opportunity arose after he had become a fiduciary employee of Electro Source. In my view, the trial judge erred in elevating Felker’s comments made when he was not an employee of Electro Source to the fulfillment of his duty of full disclosure which he acquired after he had become an employee. On his essential duty of integrity to his employer, Felker’s conduct must stand impeached. In my view, there was just cause for his dismissal.
20Had Felker been aware of the Microchip opportunity when he and Cunningham were negotiating his employment by Electro Source, had he disclosed it to Cunningham and indicated his intention to pursue it, and had he been nevertheless hired, Electro Source would not have been justified in terminating him on learning of his subsequent pursuit of the opportunity: Courtright v. Canadian Pacific Ltd. (1983), 1983 1779 (ON SC), 45 O.R. (2d) 52 (High Ct.), aff’d (1985), 1985 2131 (ON CA), 50 O.R. (2D) 560 (C.A.). But that is not what happened. The casual comments which Felker made about his future plans to own his own business months before he became a fiduciary employee cannot serve as justification for his closet attempt to obtain the Microchip opportunity after he became a fiduciary employee.
Conclusion
21In my view, the trial judge erred in finding that Electro Source did not have just cause to dismiss Felker. For the foregoing reasons, Electro Source had the right to dismiss him for cause and without notice, or salary in lieu of notice.
22I would, therefore, allow the appeal, set aside the judgment of Herold J. and order that the action be dismissed with costs. The appellant is to have its costs of the appeal.
(signed) “S. Borins J.A.”
(signed) “I agree Austin J.A.”
(signed) “I agree M. J. Moldaver J.A.”
Released: August 29, 2000