Tim Ludwig Professional Corporation et al. v. BDO Canada LLP
[Indexed as: Tim Ludwig Professional Corp. v. BDO Canada LLP]
Ontario Reports
Court of Appeal for Ontario
Strathy C.J.O., Weiler and Benotto JJ.A.
April 12, 2017
137 O.R. (3d) 570 | 2017 ONCA 292
Case Summary
Partnership — Expulsion — Partnership agreement providing that policy board could request partner's resignation if it unanimously determined that it was in best interests of partnership — Plaintiff called into meeting with two other partners and told that he had to resign because firm was over-partnered and that CEO had absolute right to require partner to resign — Policy board unanimously voting to request plaintiff's resignation three months later — That decision being predetermined as real decision was made by CEO — Defendant breaching partnership agreement as policy board did not make "determination" that plaintiff's retirement was in best interests of partnership and there was no evidentiary basis for conclusion that plaintiff's expulsion was in best interests of partnership — Motion judge not erring in awarding plaintiff expectation damages on basis that reinstatement was unrealistic — Award of aggravated damages for intangible harm suffered by plaintiff appropriate.
The plaintiff was a partner of the defendant for 22 years. In July 2014, he was called into a meeting with two other partners and told to retire. The other partners stated that the CEO had the absolute right to require a partner to retire, that this was not a negotiation and that the firm was over-partnered. Article 17.4 of the partnership agreement provided that the seven-member policy board could request a partner's resignation if the policy board unanimously determined that it was in the best interests of the partnership. The plaintiff's lawyer wrote to the CEO indicating that the process set out in the partnership agreement had not been followed. In October 2014, the policy board voted unanimously to request the plaintiff's resignation under art. 17.4, giving as the reason that the financial recovery services group in which the plaintiff worked had been impacted significantly by a decline in the economic market. The plaintiff brought an action for damages for breach of the partnership agreement. His motion for summary judgment was granted and he was awarded expectation damages for loss of profits and retirement benefits and $100,000 in aggravated damages. The defendant appealed.
Held, the appeal should be dismissed.
The standard of review of the motion judge's interpretation of the partnership agreement and to his decision on the applicable measure of damages was correctness. His findings of fact underlying his assessment of damages were entitled to deference.
The motion judge did not err by relying too heavily on the common law of partnerships, rather than solely on general principles of contractual interpretation. Section 45 of the Partnerships Act, R.S.O. 1990, c. P.5 imports the common law rules into the analysis of a partnership agreement, except to the extent they have been varied by the agreement or the Act. Article 17.4 of the partnership agreement had to be interpreted in light of the partners' duty of utmost good faith towards each other. The expropriatory nature of expulsion and the loss of profits that it entails requires that such a provision be construed strictly in favour of the expelled partner. The motion judge did not err in finding that the defendant breached art. 17.4. The policy board's expulsion decision under art. 17.4 had to be reasonably based on some evidence, rather than arbitrary or capricious. The reasons given by the policy board for the plaintiff's expulsion were bald assertions. There was no evidentiary basis on which to reasonably conclude that it was in the best interest of the partnership to request the plaintiff's resignation. Moreover, the policy board did not "determine" the best interests of the partnership. Rather, the decision to expel the plaintiff was made by the CEO.
The motion judge did not err in awarding the plaintiff expectation damages on the basis that his reinstatement was unrealistic. The motion judge also did not err in awarding the plaintiff aggravated damages for intangible harms that he had suffered, particularly embarrassment and reputational harm. Contract damages for intangible harm may be awarded where the intangible harm was in the reasonable contemplation of the parties when they entered into the agreement. Part of what the parties agree to when they enter into a partnership agreement is that they must treat each other with utmost good faith. The intangible harm resulting from a bad faith expulsion is reasonably foreseeable and flows from the breach of the duty of good faith, which is an implied term of the partnership agreement.
Appeal from Lower Court
APPEAL from the judgment of Mew J. (2016), 2016 ONSC 2225, 130 O.R. (3d) 584, [2016] O.J. No. 1781 (S.C.J.) for the plaintiff in an action for damages for breach of a partnership agreement.
Counsel:
Peter H. Griffin and Sam Johansen, for appellant.
Jonathan G. Bell and Louis M.H. Belzil, Q.C., for respondents.
Judgment
The judgment of the court was delivered by
BENOTTO J.A.:
A. Introduction
[1] The appellant, BDO Canada LLP ("BDO"), is a national accounting and advisory firm with offices across Canada. The respondents Tim Ludwig and Tim Ludwig Professional Corporation (collectively, "Ludwig") are, for the purposes of this action, one and the same. Ludwig was a partner of BDO for 22 years until, in 2014, he was called into a meeting and told to retire. He brought an action against BDO claiming that BDO breached the terms of their partnership agreement. Ludwig was granted summary judgment and awarded damages. BDO appeals the findings of liability and the damages awarded.
[2] For the reasons that follow, I would dismiss the appeal.
B. Background
[3] Ludwig is a chartered accountant and a licensed trustee in bankruptcy. From 1992 to 2014, through his company, the respondent Tim Ludwig Professional Corporation, Ludwig was a partner of BDO and its predecessor firms. Ludwig worked in BDO's insolvency group in Edmonton, Alberta.
[4] The "BDO Canada LLP Agreement" (the "partnership agreement") set out the terms of the partnership for all partners, including Ludwig. The partnership agreement was governed by the laws of Ontario.
[5] The partnership agreement provided for the timing and the terms of departure for each partner. For Ludwig, his "compulsory retirement date", as set out in art. 15.1, was January 1, 2019. The partnership agreement also provided a process for the "requested resignation" of a partner before the compulsory retirement date. Pursuant to art. 17.4, the Policy Board -- consisting of seven members elected for three-year terms -- having determined that it was not in the best interest of the partnership for the partner to remain, was to give notice to the partner of the decision and the partner was deemed to have resigned. Article 17.4 stated:
If the Policy Board unanimously determines that it is not in the best interest of the Partnership for a particular Partner to remain a Partner in the Partnership, the Policy Board shall give notice in writing to the affected Partner requesting such Partner to resign and shall give notice to that effect to all the Partners and Designated Persons. Upon delivery of such notice by the Policy Board, the affected Partner shall be deemed to have resigned from the Partnership. The affected Partner shall be entitled to receive his/her Entitlement (to the extent applicable) in accordance with Article 11 as though s/he was a retired Partner at the date on which s/he is deemed to have resigned from the Partnership.
[6] Ludwig planned to work until January 1, 2019, his compulsory retirement date.
[7] On July 8, 2014, Ludwig, then age 60, had been with BDO for 22 years. He was called into a meeting with two other partners, Blair Davidson and Darren Crocker (the "July meeting"). In this meeting, Davidson told Ludwig that:
- he would have to retire;
- the CEO (Keith Farlinger) had "the absolute right to require a partner to retire and he requires that you retire at the end of this year. This is not a negotiation[;]"
- the firm was "over partnered" and the decision to require him to retire had nothing to do with his performance or conduct;
- the decision to require his retirement was between "you or the guy with nine kids at home", which Ludwig thought was a reference to Jordan Day;
- the non-competition clause in the partnership agreement would be invoked against him following his retirement. (This was apparently a reference to the restrictive covenant provision applicable to retired or expelled partners in art. 19.1 of the partnership agreement.)
[8] BDO's legal counsel deposes that, around the time of the July meeting, BDO was restructuring its insolvency practice and reducing its complement of partners in light of the decrease in insolvency work in Edmonton. Ludwig's departure was requested based on: (i) the Edmonton Office's poor performance; (ii) the economic challenges facing the Edmonton Office and the Edmonton economy more generally; and (iii) Ludwig's underperformance, including but not limited to substandard levels of business development activities. BDO did not provide Ludwig with any particulars relating to his alleged underperformance.
[9] Following the July meeting, BDO announced Ludwig's retirement to the Edmonton financial recovery services ("FRS") group within the firm.
[10] Sometime between July 8 and August 4, 2014, BDO invoked art. 17.4 of the partnership agreement as a ground to justify requiring Ludwig to retire early. Between August and September of 2014, there were inconclusive negotiations between the parties concerning possible retirement terms for Ludwig. Ludwig made a settlement proposal on September 4, 2014. He received a response from BDO stating:
In the case that you do not sign the [proposal by BDO] by Oct 3 the policy board will respond to you under "17.4 Requested Resignation" of the partnership agreement.
[11] On September 25, 2014, Ludwig's counsel wrote to the CEO indicating that BDO was not following the process set out in the partnership agreement. Specifically, BDO did not allege any grounds for expulsion particular to Ludwig.
[12] On October 8, 2014, three months after the appellant was told that the CEO expected him to retire, the Policy Board unanimously voted to request Ludwig to resign under art. 17.4 (the "October meeting"). The minutes of the Policy Board's meeting read as follows, under the heading "Request for Partner Resignation":
The CEO noted that the FRS practice had been impacted significantly by a decline in the economic market. Changes were required to reduce the impact of the decline.
THE POLICY BOARD UNANIMOUSLY AGREED that it was in the best interest of the firm that the Policy Board requests the resignation of Tim Ludwig Professional Corporation pursuant to Section 17.4 of the BDO Partnership Agreement.
[13] On October 9, 2014, BDO provided notice of the retirement request to Ludwig's lawyer, using the same language.
C. Proceedings in the Court Below
[14] Ludwig brought a claim against BDO alleging that his expulsion breached the terms of the partnership agreement and entitled him to damages in contract. He obtained summary judgment on his claim pursuant to Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
[15] The motion judge granted summary judgment for two overarching reasons:
(i) Ludwig's expulsion did not comply with the language of art. 17.4 of the partnership agreement; and
(ii) common law principles governing partnerships require that a partner's expulsion must be reasonable and made in good faith, rather than arbitrary or capricious. BDO did not advance any evidence that the Policy Board independently decided that to expel Ludwig was in the best interest of the partnership, and it did not act in good faith because it did not give Ludwig an opportunity to explain why he should not be expelled.
[16] The motion judge then awarded Ludwig both expectation and aggravated damages.
[17] In granting summary judgment, the motion judge interpreted art. 17.4 as requiring the Policy Board to make a "determination" that Ludwig's retirement was in the best interest of the firm. He concluded that this did not happen because (i) Ludwig was told at the July meeting that the CEO required his retirement and had an absolute right to demand it; (ii) Ludwig was told that the July meeting was not a negotiation; (iii) there was no evidence that the Policy Board undertook any deliberations prior to the October meeting -- it merely formalized the CEO's prior decision; and (iv) BDO invoked art. 17.4 after Ludwig's refusal to accept the prior decision of the CEO to expel him, indicating that the Policy Board simply rubber stamped the prior decision.
[18] Although, in the motion judge's view, this disposed of the case, he went on to consider common law principles applicable to partnerships. In doing so, he rejected BDO's submission that the Policy Board could rely on a subjective standard of assessment to require Ludwig to retire under art. 17.4.
[19] Relying on Blisset v. Daniel (1853), 68 E.R. 1022, 10 Hare 493 (Eng. Ch.), the motion judge concluded that the partnership agreement should be construed strictly against partners exercising a power of expulsion, and if cause for the expulsion is not claimed or proven, the exercise of the power to expel must be made in good faith. He noted that in Lindley & Banks on Partnership, the text states that although "it is theoretically possible to frame a ground of expulsion which requires a degree of subjective judgment by the other partners . . . this is not generally to be commended", and courts will "almost inevitably scrutinise the ground relied on and may conclude that the partners are obliged to take a reasonable view of the expelled partner's conduct": Roderick I'Anson Banks, Lindley & Banks on Partnership, 19th ed. (London: Sweet & Maxwell, 2010), at para. 10-120.
[20] Therefore, even if art. 17.4 only required a subjective standard of assessment by the Policy Board, such a standard still had to be controlled by some criteria and required some evidence that would allow a court to inspect the propriety of the decision. To recognize a purely subjective standard with no supporting evidence would be contrary to the principle that an expulsion power must be interpreted strictly. It would allow BDO to have virtually unfettered discretion. It would also be contrary to the principle that, in making a determination about the best interest of the partnership under art. 17.4, BDO had to exercise its discretion to expel a partner rationally and in good faith, not arbitrarily or capriciously.
[21] Ludwig's expulsion was contrary to art. 17.4 because BDO gave no evidence in support of its bald assertions about Ludwig's performance and that of the Edmonton office. A mere vote to confirm a decision that was already made is not a "determination" in the sense required by art. 17.4. There was also no evidence that the Policy Board made its decision in the best interest of the firm, in good faith.
[22] The motion judge noted that damages are not generally available as a remedy for a wrongfully expelled partner. This principle is articulated in Lindley & Banks, at para. 10-131: "since service of an invalid notice of expulsion does not affect the recipient's status as a partner, he cannot claim damages against his co-partners for wrongful expulsion". The motion judge held, however, that this was an "extremely formalistic view" and was "unrealistic" given the facts of this case.
[23] The principle that a wrongful expulsion does not affect a partner's status as a partner is "premised on the assumption that the expelled partner can simply resume work at his or her firm and carry on as before". The motion judge held that this assumption does not follow in Ludwig's case. In particular, the motion judge pointed out that Ludwig was 62 years old and reaching the end of his career; had been "unceremoniously ejected" from the partnership; and his practice had been absorbed by other partners in the firm.
[24] Thus, the motion judge awarded Ludwig expectation damages: Western Larch Ltd. v. Di Poce Management Ltd. (2013), 117 O.R. (3d) 561, [2013] O.J. No. 5448, 2013 ONCA 722, at para. 73, leave to appeal to S.C.C. refused [2014] S.C.C.A. No. 32. He stated that it was not open to Ludwig to mitigate his losses as a result of his expulsion because he was told that the non-competition clause in art. 19.1 of the partnership agreement would be invoked against him, preventing him from seeking alternative work and making a living in his profession. Thus, Ludwig's lack of mitigation did not reduce the quantum of damages.
[25] The motion judge concluded that Ludwig was entitled to $1,233,739 in damages for loss of profits under BDO's profit-sharing agreement, which he would have received if he had worked to his compulsory retirement date (January 1, 2019). He was also entitled to receive $61,198, reflecting the additional retirement benefit that he would have received if he retired on that date.
[26] The motion judge also awarded $100,000 in aggravated damages for the harm to Ludwig's reputation that his expulsion caused. The motion judge relied on Plester v. Wawanesa Mutual Insurance Co., [2006] O.J. No. 2139, 213 O.A.C. 241 (C.A.), leave to appeal to S.C.C. refused [2006] S.C.C.A. No. 315, for the principle that aggravated damages are appropriate where the defendant's reckless or intentional conduct causes the plaintiff intangible harm. In particular, the motion judge noted that the manner in which Ludwig was expelled, which included being told his expulsion was non-negotiable, that art. 19.1 (the non-competition clause) applied, and BDO's unilateral announcement of Ludwig's retirement to the firm, warranted an award of aggravated damages.
D. Issues
[27] The issues to be determined are:
(1) what is the standard of review;
(2) did the motion judge correctly interpret the agreement;
(3) did the motion judge err in awarding expectation and aggravated damages?
E. Analysis
(1) Standard of Review
[28] Ludwig submits that the standard of review is deferential, namely, that there must be a palpable and overriding error for this court to intervene. He says this because, in his submission, the judgment was based on the motion judges' factual findings.
[29] I do not agree with this submission. In my view, the correctness standard of review applies to the motion judge's interpretation of the partnership agreement and to his decision on the applicable measure of damages. The errors BDO alleges are errors of law, not findings of fact. As the motion judge indicated, "The facts of this case are straightforward and, for the most part, not in dispute." The motion judge was not called upon to consider a factual matrix. Nor was there any evidence of negotiations between the parties at the time the agreement was signed: Sattva Capital Corp. v. Creston Moly Corp., [2014] 2 S.C.R. 633, [2014] S.C.J. No. 53, 2014 SCC 53, at paras. 51-53.
[30] The motion judge's findings of fact underlying his assessment of damages, however, are entitled to deference: see de Montigny v. Brossard (Succession), [2010] 3 S.C.R. 64, [2010] S.C.J. No. 51, 2010 SCC 51, at para. 27.
(2) Interpretation of the Agreement
[31] I begin by considering the legislative and common law framework against which the partnership agreement should be interpreted. I then apply these principles to the agreement.
(a) The Relevant Legislative and Common Law Framework
[32] The Ontario Partnerships Act, R.S.O. 1990, c. P.5 sets out the requirements for the expulsion of a partner. The relevant provisions of the Partnerships Act are:
Section 25: "No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners."
Section 28: "Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or the partner's legal representatives."
Section 45: "The rules of equity and of common law applicable to partnership continue in force, except so far as they are inconsistent with the express provisions of this Act."
[33] BDO submits that the motion judge erred in relying too heavily on the common law of partnerships, rather than solely on general principles of contractual interpretation. I do not agree with this submission. In my view, s. 45 of the Partnerships Act imports the common law rules into the analysis of a partnership agreement, except to the extent they have been varied by the agreement or the Act. The relevant common law principles, which inform the construction of a partnership agreement, are explained in Lindley & Banks as follows:
Because an expulsion from a partnership is expropriatory in nature, depriving the partner of future profits, an expulsion provision in a partnership agreement will be construed strictly: para. 10-123.
Partners are fiduciaries among themselves and the utmost good faith is owed from every member of a partnership towards every other member: para. 16-01.
Where a discretion is conferred on the management of the firm or on a majority of partners, a partner will normally be entitled to expect that it will be exercised rationally and in good faith and not arbitrarily or capriciously: at para. 16-09.
[34] This court considered the interplay between the Partnerships Act and the common law in Rochwerg v. Truster (2002), 58 O.R. (3d) 687, [2002] O.J. No. 1230 (C.A.). Rochwerg involved a partner in an accounting partnership who disclosed to his partners that he was a director of a corporate client of the firm and remitted his director's fees to the firm, but did not disclose that he was entitled as director to shares and stock options in the company. When he left the partnership, an issue arose as to whether he was required to account to his partners for his shares and stock options.
[35] Cronk J.A. held that both the common law of partnerships and the Partnerships Act imposed an obligation on the partner to disclose his shares and options. Cronk J.A. wrote, at para. 36:
It has long been established that partners owe a fiduciary duty to each other, and that equitable principles hold fiduciaries to a strict standard of conduct, encompassing duties of loyalty, utmost good faith and avoidance of conflict of duty and self-interest. These are well recognized, core principles of the law of partnership.
(Emphasis added)
[36] And, at paras. 62-63:
The fiduciary duty between partners thus arises not only from the reciprocal agency relationship between them but, also, from the duty of utmost good faith which each partner owes to the other. Fundamental to this overarching fiduciary duty is the requirement that each partner place the interests of the partnership, and the avoidance of situations which create, or could create, a conflict between fiduciary duty and the interests of the partnership, ahead of a partner's private interests. Accordingly, partners are required to prefer the interests of the partnership over their own personal interests. The scope of the fiduciary duty in partnerships is of the broadest nature. As stated by Vice-Chancellor Bacon in Helmore v. Smith (No. 1) (at p. 444):
[I]f fiduciary relation means anything I cannot conceive a stronger case of fiduciary relation than that which exists between partners. Their mutual confidence is the life blood of the concern. It is because they trust one another that they are partners in the first instance; it is because they continue to trust each other that the business goes on.
Mutual trust, confidence and good faith are the cornerstones of the modern professional services partnership. Without them, the very essence of the partnership arrangement is eroded and, ultimately, destroyed. In my view, the equitable principles developed over the last century concerning the fiduciary obligations of partners continue to control contemporary partnerships. They may require, however, flexible application to respond to changing partnership structures, activities and settings.
(Citations omitted)
[37] In the result, partners owe each other a duty of utmost good faith at common law and the traditional rules governing partnerships discussed in Lindley & Banks continue to apply in Ontario: see DiPoce v. DeCicco, [2013] O.J. No. 4741, 2013 ONSC 6409 (S.C.J.), at para. 18; and Springer v. Aird & Berlis LLP (2009), 96 O.R. (3d) 325, [2009] O.J. No. 1408 (S.C.J.), at paras. 167-68, affd (2010), 100 O.R. (3d) 575, [2010] O.J. No. 1578, 2010 ONCA 287.
[38] In summary, art. 17.4 of the partnership agreement must be interpreted in light of the partners' duty of utmost good faith towards each other. The expropriatory nature of expulsion and the loss of profits that it entails requires that the provision be construed strictly in favour of the expelled partner.
[39] I now turn to consider whether BDO breached art. 17.4.
(b) Application of the Principles
[40] The wording of art. 17.4 is consistent with the intent of the common law with respect to the expectation of good faith on the part of the partners and strict construction of an expulsion clause. The wording of art. 17.4 authorizes the Policy Board to request a partner's resignation if it "unanimously determines that it is not in the best interest of the Partnership for a particular Partner to remain".
[41] For the reasons that follow, I conclude that BDO breached art. 17.4 of the partnership agreement.
[42] First, to trigger art. 17.4, there must be some evidence put before and considered by the Policy Board that shows it was reasonable for the Policy Board to conclude that it is not in the partnership's best interest for a particular partner to remain. The point of the obligation to consider some evidence that provides a basis in fact for a partner's expulsion under art. 17.4 is to ensure that the Policy Board's decision is made in good faith in the partnership's best interest and does not arbitrarily or capriciously expropriate the expelled partner's profits. This approach is consistent with the case law the motion judge referenced, namely, the decision of the Court of Exchequer in Wood v. Woad (1873), L.R. 9 Ex. 190, [1874-1880] All E.R. Rep. 408 (Eng. Exch.), as described by Lord Jessel in Russell v. Russell (1880), 14 Ch. D. 471 (Eng. Ch. Div.), at p. 479.
[43] To say that the Policy Board's expulsion decision under art. 17.4 should be reasonably based on some evidence, rather than arbitrary or capricious, is not to interpret the provision without regard to its purpose of providing a lower standard for expulsion as compared to art. 17.1. Article 17.1 sets out a list of specific grounds justifying a partner's expulsion (for example, if a partner's conduct is likely to damage the partnership or if a partner is convicted of a criminal offence).
[44] The obligation to provide evidence is to ensure that the Policy Board's decision is reasonably referable to the best interest requirement stipulated in art. 17.4 and imported by the common law duty of good faith. It is not an obligation to consider some particular ground that would make it in the best interest of the partnership for a partner to not remain with it. A more onerous requirement of this kind is imposed by art. 17.1's enumerated, pre-designated grounds of misconduct. The focus under art. 17.4 is not on the nature, substance or merits of a ground on which the Policy Board relies to request a partner's retirement; it is whether there was a ground that, on the record, could reasonably justify a partner's expulsion in the partnership's best interest. This is what the language of art. 17.4 requires.
[45] The Policy Board's reasons, as reflected in the minutes of the October meeting, relate to the economic climate in Edmonton and the firm's economic circumstances. In the July meeting, Ludwig was told that his underperformance was also a factor. I agree with the motion judge that these were bald assertions. It is significant that neither the CEO nor any member of the Policy Board gave evidence on the summary judgment motion. There was no evidentiary basis on which to reasonably conclude that it was in the best interest of the partnership to request Ludwig's retirement.
[46] Second, it is clear from the evidence that the decision to expel Ludwig was not made by the Policy Board, as required by art. 17.4. It was made by the CEO. Ludwig was informed of such in the July meeting when he was told (i) the CEO required his retirement; (ii) the CEO had the absolute right to demand Ludwig's resignation; and (iii) this was not a negotiation. This uncontradicted evidence supports the inference that the Policy Board's decision in October was pre-determined.
[47] The language of art. 17.4 requires the Policy Board to "determine" the best interest of the partnership. There is no evidence that it did so. The motion judge, at para. 52, stated:
[A]s BDO's written argument acknowledges, "this decision [to reduce the number of partners in the Edmonton] (sic) was made by BDO and, after negotiations with the Plaintiffs failed, was ultimately carried out by the Policy Board" etc. This assertion serves to confirm that the Policy Board, in its meeting on 8 October, merely formalised a decision that had been made previously and by someone other than the Policy Board itself. There is no evidence as to what deliberations, if any, the Policy Board undertook at, or in advance of the 8 October meeting.
(Emphasis in original)
[48] In summary, I conclude that the motion judge was correct in his interpretation of art. 17.4 and did not err in holding that BDO did not comply with the provision in purporting to expel Ludwig from the partnership.
(3) Damages
[49] The motion judge awarded both expectation damages and aggravated damages. For the reasons that follow, I would not interfere with either award.
(a) Expectation Damages
[50] The motion judge noted that although damages are generally not available to a partner who has been wrongfully expelled, in this case reinstatement was "unrealistic". He therefore awarded damages on an expectation basis.
[51] BDO submits that the motion judge erred in awarding damages that reflect the profits that Ludwig would have received had the contract not been breached. The motion judge acknowledged that Ludwig could have been expelled without cause had BDO properly followed the directives of art. 17.4. In other words, the Policy Board could have forced Ludwig out if it acted in good faith and relied on sufficient evidence in making an independent determination that it was in the best interest of the partnership for Ludwig to retire. BDO argues that, in terms of damages, Ludwig was only entitled to be put in the position he would have been in had the contract been performed. That is, if the Policy Board had properly executed its power to expel him from the partnership.
[52] BDO also alleges that the motion judge erred by failing to reduce Ludwig's damages for failing to mitigate. Although art. 19.1 is a non-competition clause, BDO submits that the clause was limited to a 40-kilometre radius from the Edmonton office and expired two years from the date of Ludwig's expulsion. In any event, BDO argues, there were other options available to Ludwig to mitigate his losses.
[53] These submissions by BDO were made for the first time on appeal without supporting evidence. Before the motion judge, BDO did not contest Ludwig's analysis with respect to damages, and there was no evidence before the motion judge to contradict any element of Ludwig's claim for damages. Neither party raised the issue of mitigation in the proceedings below.
[54] The evidentiary obligation on a summary judgment motion is well established. Each side must "put its best foot forward": see Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423, [1996] O.J. No. 1568 (Gen. Div.), at p. 434 O.R., affd [1997] O.J. No. 3754, 74 A.C.W.S. (3d) 207 (C.A.). The motion judge is entitled to presume that the evidentiary record is complete and there will be nothing further if the issue were to go to trial: see Dawson v. Rexcraft Storage and Warehouse Inc., [1998] O.J. No. 3240, 111 O.A.C. 201 (C.A.), at para. 17.
[55] In these particular circumstances, it was open to the motion judge to accept Ludwig's uncontradicted evidence, and I would not interfere with his conclusion.
[56] I note that the availability of damages arises from the particular facts of this case and the motion judge's finding that Ludwig cannot feasibly return to the firm. The general principle -- articulated in Lindley & Banks -- that a wrongful expulsion does not affect the status of the expellee, still governs.
[57] Likewise, although in this case the motion judge found that the partnership agreement's non-compete clause effectively prevented Ludwig from mitigating his losses, this will depend upon the particulars of the case.
(b) Aggravated Damages
[58] The motion judge awarded aggravated damages for "intangible harms" that Ludwig suffered, particularly embarrassment and reputational harm. BDO submits that such damages cannot be awarded for a breach of contract arising out of a partnership.
[59] I begin with a review of the jurisprudence regarding aggravated damages for intangible harm. Then I review the facts before the motion judge and apply the principles arising out of the jurisprudence to those facts.
[60] Contract damages for intangible harm may be awarded under the principle established in Hadley v. Baxendale (1854), 156 E.R. 145, [1854] EWHC Exch. J70 (Eng. Exch.), where the intangible harm was in the reasonable contemplation of the parties when they entered into the agreement. In Fidler v. Sun Life Assurance Co. of Canada, [2006] 2 S.C.R. 3, [2006] S.C.J. No. 30, 2006 SCC 30, at paras. 44-45, the Supreme Court stated that all types of damages for breach of contract are awarded on the basis of the "reasonable foreseeability" principle: damages are meant to compensate the victim of the breach by reference to what was in the reasonable contemplation of the parties at the time the contract was made.
[61] In Fidler, at para. 52, the court distinguished contract damages for intangible harm from damages for intangible harm arising out of circumstances that aggravate the breach of contract, referring to the latter as "true aggravated damages":
[These damages] are not awarded under the general principle of Hadley v. Baxendale, but rest on a separate cause of action -- usually in tort -- like defamation, oppression or fraud. The idea that damages for mental distress for breach of contract may be awarded where an object of a contract was to secure a particular psychological benefit has no effect on the availability of such damages. If a plaintiff can establish mental distress as a result of the breach of an independent cause of action, then he or she may be able to recover accordingly. The award of damages in such a case arises from the separate cause of action. It does not arise out of the contractual breach itself, and it has nothing to do with contractual damages under the rule in Hadley v. Baxendale.
[62] In the employment context, damages for intangible harm arising out of the manner of termination may be awarded pursuant to the Hadley v. Baxendale principle. In Keays v. Honda Canada Inc. (2008), 92 O.R. (3d) 479, [2008] 2 S.C.R. 362, [2008] S.C.J. No. 40, 2008 SCC 39, the Supreme Court confirmed the rule established in Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701, [1997] S.C.J. No. 94 that employers owe an obligation of good faith and fair dealing in the manner of dismissing an employee, such that an employment contract creates an expectation that the employer will be "candid, reasonable, honest and forthright with its employees": Keays, at para. 58. Breach of this obligation therefore gives rise to damages for intangible harm, which is reasonably foreseeable and in the contemplation of the parties as a consequence of the breach. In Keays, the Supreme Court stated, at para. 58:
Fidler provides that "as long as the promise in relation to state of mind is a part of the bargain in the reasonable contemplation of the contracting parties, mental distress damages arising from its breach are recoverable". In Wallace, the Court held employers "to an obligation of good faith and fair dealing in the manner of dismissal" and created the expectation that, in the course of dismissal, employers would be "candid, reasonable, honest and forthright with their employees". At least since that time, then, there has been expectation by both parties to the contract that employers will act in good faith in the manner of dismissal. Failure to do so can lead to foreseeable, compensable damages.
(Citations omitted)
[63] Intangible damages for bad faith in the manner of dismissal of employment are therefore not awarded for an independently actionable wrong and are not "true aggravated damages", as defined in Fidler. They arise from the breach of the employment contract -- specifically, the employer's implied contractual obligation to act in good faith when dismissing an employee.
[64] The decision in Keays overturned that in Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085, [1989] S.C.J. No. 46, in which the court held that damages for intangible harm in the employment context were only available if the employer committed an independently actionable wrong. Keays also overturned the proposition established in Wallace that bad faith in the manner of dismissal entitles the employee to an increase in damages in lieu of proper notice of termination. As the court wrote in Keays, at para. 59:
[T]here is no reason to retain the distinction between "true aggravated damages" resulting from a separate cause of action and moral damages resulting from conduct in the manner of termination. Damages attributable to conduct in the manner of dismissal are always to be awarded under the Hadley principle. Moreover, in cases where damages are awarded, no extension of the notice period is to be used to determine the proper amount to be paid. The amount is to be fixed according to the same principles and in the same way as in all other cases dealing with moral damages. 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.
[65] More recently, this court summarized the availability of intangible damages for breach of employment contracts, along the same lines as those presented above, in Strudwick v. Applied Consumer & Clinical Evaluations Inc., [2016] O.J. No. 3556, 2016 ONCA 520, 349 O.A.C. 360, at paras. 90-91.
[66] I pause to note that caution must be exercised when directly applying the rules governing intangible damages in the employment context to partners. Courts have held that partners are typically not employees and are governed by a separate legal regime at common law and have specialized legislation, particularly the Partnerships Act: see SMI Sales Inc. v. Ontario (Minister of Finance), [2007] O.J. No. 2410, 2007 ONCA 451, 226 O.A.C. 169; Wiebe Door Services Ltd. v. M.N.R., [1986] F.C.J. No. 1052, [1986] 3 F.C. 553 (C.A.); and McCormick v. Fasken Martineau DuMoulin LLP, [2014] 2 S.C.R. 108, [2014] S.C.J. No. 39, 2014 SCC 39.
[67] However, the reasoning of the court in Keays, in combination with the principles of partnerships law discussed above, suggests that damages for intangible harm are available in the partnerships context on the Hadley v. Baxendale principle where the harm was in the reasonable contemplation of the parties when they made their contract.
[68] Keays holds that, because employers have an implied contractual obligation of good faith in the manner of dismissal, damages for bad faith in the manner of dismissal are within the contemplation of the parties when they enter into the contract. Given the duty of utmost good faith owed between partners, confirmed in Rochwerg, the reasoning in Keays should apply in the partnerships context: damages flowing from bad faith in the manner of a partner's expulsion are within the reasonable contemplation of the parties when they enter into the partnership agreement. Such damages can be awarded on the Hadley v. Baxendale principle.
[69] In other words, part of what the parties agree to when they enter into the partnership agreement is that they must treat each other with utmost good faith. The intangible harm resulting from a bad faith expulsion is reasonably foreseeable and flows from the breach of the duty of good faith, which is an implied term of the partnership agreement.
[70] The motion judge awarded aggravated damages on the basis of BDO's conduct and the humiliation it caused. He said, at para. 93:
[T]he circumstances of Mr. Ludwig's removal, including the "negotiation" that was not, in fact, a negotiation (at least vis-à-vis the fundamental issue of the termination of Mr. Ludwig's partnership), the unilateral announcement of his "retirement" by BDO, his subsequent ejection ("deemed" resignation) from the partnership and BDO's invocation of the non-competition clause in the Partnership Agreement, warrant an award of aggravated damages reflecting the embarrassment and reputational harm which he experienced. I fix those damages at $100,000.
[71] I see no error in the motion judge's award of aggravated damages.
F. Disposition
[72] I would dismiss the appeal with costs payable to the respondent in the agreed upon amount of $25,000, inclusive of disbursements and HST.
Appeal dismissed.
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